To subadvise or not to subadvise.

That is the question some banks face as they become bigger players in managing mutual fund assets.

Executives at many bank-owned fund companies say they feel more comfortable outsourcing the management of more specialized portfolios, such as international funds, to asset managers who have the experience and resources to handle them.

Others, however, have bought the expertise that lets them bring the management of such funds in-house. First Union Corp. of Charlotte, N.C., is one such institution.

The explosive growth of its Evergreen Funds unit, which now manages $54 billion in 90 mutual funds, has been fueled by acquisitions. Some of these deals have let the company bring management of funds back home.

First Union recently pulled subadvisory agreements on two international funds because of expertise it acquired in the 1996 purchase of Keystone Investments, said Gordon Forrester, an Evergreen senior vice president.

"With that acquisition we inherited talent we previously didn't have," he said.

A key player who came over from Keystone is Gilman Gunn, now chief investment officer for Evergreen's international group.

In one instance, the fund unit was able to merge an Evergreen international fund into an international growth fund inherited from Keystone. That let Evergreen terminate a subadvisory agreement with Warburg Pincus Asset Management in New York, Mr. Forrester said.

For similar reasons, he said, First Union has also brought in-house the management of two state-specific money market funds in recent weeks. They had been subadvised by Reich & Tang of New York.

"It is size-related," said Joy Montgomery, president of Money Marketing Initiatives, a Basking Ridge, N.J., consulting firm. "At a certain point you have enough assets that it makes sense to hire your own people."

But Evergreen is not discarding the outsourcing of asset management. Mr. Forrester said the concept will be used in a "unique" fashion for its Masters Fund, a domestic equity portfolio to be launched next month. Evergreen will co-manage it with three big-name fund companies.

For banks with smaller fund families, subadvisers are a must if they want to offer their customers a wide range of asset classes.

Washington Mutual Inc., Seattle, has also experienced growth in its fund family, though not quite at the pace of First Union. It uses subadvisers on several funds, including its international and municipal portfolios, said Bill Papesh, president of WM Advisors, the thrift's asset management arm.

"If you want to be an international manager you have to have the infrastructure in place,"Mr. Papesh said. For the management of global funds, he added, "we're not going to have someone sitting in Seattle." So the $4.6 billion WM Fund family uses Warburg Pincus on its WM International Growth Fund.

Fifth Third Bancorp relies on Morgan Stanley Dean Witter for its international fund, said John Schmitz, director of equity strategy at the Cincinnati banking company. Fifth Third manages about $4 billion of mutual fund assets.

"We don't have the expertise here in the heart of the Midwest," Mr. Schmitz said. "But we can leverage the whole of Morgan Stanley, which has analysts all over the world."

Amsouth Bancorp, Birmingham, Ala., takes a slightly different approach. It uses several subadvisers but owns 50% equity stakes in each, said Michael C. Baker, a senior executive vice president.

Mr. Baker said that, unlike some of its peers, Amsouth is not looking for outright ownership of these firms, which include Oakbrook Investments, Sawgrass Asset Management, and Rockhaven Asset Management.

The cultural gulf between banks and entrepreneurial fund companies often prevents such acquisitions from working, he said. "The danger is, you take a number of good asset managers and cause them to be nothing more than employees."

Amsouth relies on the three start-up firms to manage several portfolios in its $3.7 billion fund family. Mr. Baker said the company will decrease its stake in the companies over time but continue to share in the revenue streams from all three as payment for helping to get them started.

Thus the bank gets the best of both worlds, Mr. Baker said. "We acquire the expertise for our own purposes and at the same time take a longer-term investment in a business that generates revenues," he said.

Not all banks are happy with revenue-sharing agreements or minority stakes. Some want to be able to control the firms that manage their funds, Ms. Montgomery said.

But most subadvisers "don't want to be owned by banks," she said.

What the fund companies that subadvise do want is to leverage the bank relationship as much as possible, said Timothy C. Pillion, a senior vice president in charge of global sales at Federated Investors, Pittsburgh.

Federated subadvises high-yield bond portfolios for U.S. Bancorp and for Bank One Corp., through a previous relationship with First Chicago NBD Corp.

"We want to be in their retail and institutional distribution channels and in their 401(k)" plans, Mr. Pillion said. "It's part of our overall strategy."

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