Four Darn Good Subadvised Funds

I'm not sure why, but some investors have a tough time warming up to subadvised funds. These are funds where the fund company hires an outside asset manager to run the portfolio while the fund company handles the investors' accounts, SEC filings, and the rest of the back-office work.

Some investors have written me concerned that the subadvisor may not be as committed to the fund as they would be to their own. That may occasionally be the case, but there are plenty of instances where it isn't, and you're missing out if you pass on such funds. Some subadvisors have been running certain funds for so long that their commitment is obvious. And a number of the better subadvised funds can claim high levels of manager investment in the funds.

Subadvising isn't a magic formula for success, but there are good reasons behind it. Running the administrative side of mutual funds isn't closely related to the skills needed to manage portfolios, and some subadvisors and fund companies have gone so far as to swear off the other side of the business so that they can focus on what they are good at. In addition, fund companies that hire subadvisors can offer scale that brings in a lot of money, driving up revenues for the subadvisor while driving down fees for the investor. Subadvisors don't mind that those lower fees also make for a better track record, either.

On top of that, fund companies that hire subadvisors for their funds have the ability to fire them and replace them with a different group should problems such as manager departures develop. It makes for a clean break and spares investors from having to stick with a manager that's attempting a turnaround.

Here's a look at four darn good subadvised funds.

 Masters' Select Equity (MSEFX) illustrates the added level of diversification you can get when a fund company doles out money to multiple subadvisors. This fund offers different managers who are supported by their own analysts and run different strategies. Here you get it in one fund where Masters limits each manager to a focused portfolio so that the portfolio doesn't end up bloated and full of tiny positions. But the main appeal here is that Masters has rounded up some really good managers. You get Christopher Davis and Ken Feinberg of  Davis New York Venture (NYVTX), teams from  Touchstone Sands Capital Select Growth (PTSGX) and Turner Concentrated Growth , Mason Hawkins of  Longleaf Partners (LLPFX), Clyde McGregor of  Oakmark Equity & Income (OAKBX), and Dick Weiss and Bill D'Alonzo of  Brandywine (BRWIX). The top manager investment level in this fund is more than $1 million.

 Dreyfus Appreciation (DGAGX) has been run by Houston-based Fayez Sarofim since its inception in 1984. Over that time, the fund has outperformed the S&P 500 Index but with much less risk. Sarofim's emphasis on high-quality companies has tamped volatility. A perfect illustration came over the past two years. The fund lost 4.6% less than the index in 2008's downturn but gained just 5.5% less in 2009. Check out its rolling returns and you'll see that it has produced above-average performance even though the past decade was biased against the giant, high-quality companies the fund favors. Still, the fund's mild-mannered nature has kept assets to just $1.9 billion. At least $1 million of that is the manager's own money.

 Hartford Capital Appreciation (ITHAX) completely wrecks my theme of overlooked subadvised funds but it does fit the great management theme at least. This $20 billion broker-sold fund has been a standout under Wellington's Saul Panell. Frank Catrickes joined two years later in 1998. Panell is an opportunistic investor who goes wherever the good deals are. Admittedly, the fund is too big to make much of small caps the way it did in the early days but it's still chugging along nicely. The only knock is that its 1.22% expense ratio is steep for a $20 billion fund. The top manager investment level here is more than $1 million.

 Vanguard Dividend Growth (VDIGX) has no such issues with expense ratios. Here you can tap Wellington's skills for a mere 0.36%--not too shabby and a welcome bargain considering that funds pay their expense ratios out of dividends first, thus cutting into investors' tax-advantaged dividend stream. At this fund, Donald Kilbride looks not just for big dividends but for growing ones. That was a plus in 2008 as it kept him out of firms with shaky balance sheets. Since coming on board in early 2006, Kilbride is comfortably ahead of the S&P 500. As of the most recent filing in January 2009, Kilbride's investment in the fund was in the $500,000 to $1 million range. However, appreciation alone should have brought his investment close to $1 million. One note on its track record: The fund was a utilities fund until December 2002, so I'd ignore the record before then.

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