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"Style over substance" -- a phrase usually uttered with scorn, but that's exactly


many fund investors should be thinking.

Reaping big gains (or even modest gains) in this market has nothing to do with which sectors you're putting your money into. Rather, investors should place more emphasis on how their money is being managed in any given fund in any given asset class. Tax-efficient funds appear to be the surest route to bigger returns, according to a new study by Lipper, a Reuters company.

Investors give up as much as 23% of their total returns

every year

because of mutual funds that don't try to minimize taxes. (A summary of the study's surprising results can be found

here.) That's bad in any given year, but that poor management compounded over time can really pack a wallop.

And there's no reason for the trade-off: Lipper found that the average tax-managed fund beat the average non-tax-managed fund in every category. So it would seem that keeping taxes in mind while trading doesn't limit a fund manager's ability to make money for investors.

That's even more important these days, since overall returns will likely be much lower. "If we're entering an environment -- as most economists and pundits predict -- of fairly flat or modest returns, keeping as much pretax earnings as possible will be vital for investors," says Morningstar senior analyst William Harding.

Choosing a tax efficient fund isn't as tough as it seems. Index funds are inherently tax efficient, as they only buy and sell to moderately adjust a stock's weighting as dictated by the underlying index.

Some index funds are inherently less tax-efficient than others, though. Small-company index funds are not as tax-efficient as their large-company counterparts, for instance. Indexes that track small companies generally have a higher turnover, since the companies are presumably growing right out of the index. If a fund manager is going to stay true to the index -- or, in the case of active managers, simply stay true to the asset class -- more trades are necessary. More trades frequently, but not always, lead to higher taxes.

Active Efficiency

Aside from looking for index funds, the first (and simplest) screen that investors can use is to simply check a fund's name. Funds that have "tax efficient," "tax managed" or the like in their names are bound by

Securities and Exchange Commission

regulations to keep taxes at the forefront of trading decisions. (The SEC's truth-in-labeling rule requires that 80% of a fund's portfolio must conform to its name.)

Vanguard has a broad lineup of tax managed funds that aren't quite index funds. But not all tax-efficient funds are labeled as such. For instance, Vanguard's

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Growth and Income fund essentially tracks the

S&P 500

but pays more attention to tax matters, Harding says. At this quantitative fund that seeks to consistently beat the S&P 500, manager John Cone has also kept its taxable distributions to a minimum. Its turnover rate is anywhere from 40% to 80% in a rising market, according to Morningstar.

That's far higher than the 4% turnover of its index counterpart. The fund is unlikely to make a distribution in the near future, though, thanks to the falling market. In addition, the fund has booked tax-loss carry-forwards that amount to more than 10% of assets, according to Morningstar. That will offset any future gains for a long time.

Fund managers that employ a rigorous discipline when buying and selling holdings also often include tax management in their trading decisions. For instance, Bill Nygren at

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Oakmark actively manages his multi-cap fund's tax position, and since taking over management in March 2000 has beaten his average peer by more than 40 percentage points. His long term record at

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Oakmark Select is equally impressive and largely due to tax management.

The value-oriented Tweedy, Browne

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Global Value, managed by Christopher H. Browne, also keeps taxes under control. This fund has a buy-and-hold strategy that keeps turnover to 7%. (Morningstar analyst Emily Hall calls this fund "hopelessly, wonderfully boring.")

Investors should read a fund's prospectus (gasp!) and shareholders' reports to get a sense of the manager's style and strategy. Turnover, a measure of how frequently trades are made, has typically been a fair proxy for tax management but shouldn't be your sole guide. The Lipper study found that 10% of tax-efficient funds actually had higher-than-average turnover.

Turnover figures on the fringe, however, will likely indicate a fund's tax efficiency. A fund with less than 20% to 30% turnover is likely very tax efficient, Harding says, while those with turnover more like 200% are almost certainly highly inefficient.