Asset managers are jumping on the so-called tax-aware bandwagon, with a spate of mutual funds aimed at minimizing the tax burden for investors.

The strategy is paying off. Prudential Investors raised more than $200 million in one month in its Tax-Managed Equity Fund, which began trading March 4. Tax-aware funds were recently launched by American Century, Barrett Associates Inc., SunAmerica Inc., and SunTrust Banks Inc.

The strategy-long-employ-ed for separate accounts or common funds in many private banks and trust departments-has been offered before in mutual funds. But the pace of portfolios introduced as "tax-managed," "tax-aware," "tax-efficient," or "tax-sensitive" seems to be accelerating.

Last year, 12 funds that carried such buzzwords were launched, according to Lipper Analytical Services Inc. of Summit, N.J. That's twice the number introduced in 1997 and three times the number unveiled in 1996, according to Lipper. Most invest in large-capital U.S. stocks.

The bull market is fueling demand among retail investors for strong after-tax returns on investments outside tax-deferred retirement plans, proprietors of the funds said.

"People in IRAs and 401(k)s couldn't care less, but people who were taxable had a huge tax bill to pay," said Terry Banet, a vice president at J.P. Morgan & Co.

Ms. Banet subadvises the SunAmerica Tax Managed Equity Fund, introduced March 8. She and other portfolio managers described the strategy as more complex than simply selling depreciated securities to offset gains in others. Sometimes they will hold a stock to extend the term of the gain until it reaches a lower tax rate.

"You keep track of your tax lots," said James Scott, a co-manager of Prudential Tax-Managed Equity Fund. "There are more moving parts to this than a typical equity fund, because you've always got one eye on the tax bill and another on how good does the portfolio look."

Not all tax-aware funds are constructed similarly, said Stephen A. Schoepke, vice president of research and product development at SunAmerica Asset Management Corp., who picked J.P. Morgan as subadviser.

He said the New York bank provided a "cutting-edge third generation" of tax-aware strategies.

Mr. Schoepke said he was attracted to a linear model that J.P. Morgan designed to "minimize taxes for each and every trade," which he said is its "competitive advantage."

Other funds used either of two strategies that did not strike the right balance, he said. One strategy was to have a low turnover of stocks in the portfolio, but that does not prevent large gains. Another strategy eliminates high-yielding stocks as buy candidates.

"It left kind of a bad taste in my mouth. What we want is somebody who picks stocks first," he said. However, he added, "you can't just go out and get a portfolio manager who's a good stock picker and say, 'O.K., now make your portfolio tax-efficient."

Despite the growing interest and enthusiasm, there are detractors. Mutual funds cannot be tax efficient for all people, said Jerome Paolini, vice president of managed investment products in the private client services group of Wells Fargo & Co.

"We still believe true tax efficiency is achieved through a separately managed portfolio, where you offset gains with losses and handle the individual tax situation of that individual client," Mr. Paolini said.

Tax-aware investment strategies work the old-fashioned way, he added, with a client and a portfolio manager talking about implications of trades. However, Mr. Paolini reserved judgment on whether the new tax-aware mutual funds will live up to their names.

National City Corp. of Cleveland used the strategy for 10 years in a common trust fund that it converted to a mutual fund in April. The portfolio, Armada Tax Managed Equity Fund, which has $263 million of assets under management, returned 38.8% last year and a compounded 31.9% for the previous three years.

"So we smoked the S&P last year and the trailing three," said Eugene March, team leader of the fund.

Mr. March said tax-aware mutual funds can deliver an after-tax return that is close to a pretax return each year.

Pitching tax-aware investing to retail investors will become more prevalent, said Kathleen Harrison, head of product management and marketing for National City's proprietary funds.

"I don't think this is a flash-in-the-pan marketing strategy," Ms. Harrison said.

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