Dreyfus: No Longer King Of The JungleJeffrey M. Laderman
Ever since the lion climbed out of a Wall Street subway stairwell nearly 35 years ago, Dreyfus Corp. has been the best-known brand name in mutual funds. Dreyfus was the first mutual-fund company to advertise on TV, the first to offer a municipal-bond fund, and the first to rake in $1 billion in a new concept: the money-market fund.
Dreyfus is still a powerhouse. It has $88 billion in assets under management (chart), more than double that of 1988, and nearly 2 million shareholder accounts. But just last year, Franklin Resources displaced Dreyfus as the largest fund company when measured by stock-market capitalization. Dreyfus is no longer the king of the jungle.
LACKLUSTER. While the mutual-fund industry is booming, Dreyfus' profits and stock price are flagging. The huge buildup in assets has cost the company dearly. Dreyfus gathered billions by waiving fees, absorbing mutual-fund expenses, and spending heavily on advertising. Two-thirds of its assets are in money-market funds, where margins are paper-thin. And as short-term interest rates continue to dive, attracting new money will be harder and costlier. Getting investors to shift cash from money funds to Dreyfus equity funds--where margins are fat--is no easy sell. Some of its equity funds have periods of strong performance, but the company has developed no superstars to match Peter Lynch at Fidelity or John B. Neff at Vanguard.
To its credit, Dreyfus has not chased every new investment craze. When rivals were raking billions into junk-bond funds, Dreyfus stayed out of the game--so it had no explaining to do when the junk market imploded. Likewise, Dreyfus doesn't sell sector funds, single-country funds, or funds that invest in exotic mortgage-backed securities--all deemed "not in the best long-term interests of our customers," by Joseph S. DiMartino, 49, president and chief operating officer.
Still, many on the Street say caution at Dreyfus has gone a little too far--especially in equity funds. Unlike most mutual-fund companies, Dreyfus equity funds can hedge against stock-market declines by raising cash, using futures and options, or even selling short. "You're not going to suffer a disaster in a Dreyfus fund in which you lose 30% of your money," says Don Phillips, publisher of Morningstar Mutual Funds. "But you might find the market was up 30% and your Dreyfus fund was up only 4%." That happened last year to the $540 million Dreyfus Capital Value Fund.
A cautious approach to investing is the hallmark of Howard Stein, chairman and CEO, the portfolio manager who has been running the parent company for nearly three decades. Stein, 66, who spent his youth training to be a concert violinist, is considered a giant in mutual funds. And that is precisely why many industry executives and securities analysts are puzzled by his emphasis on money-market funds. Stein declined to be interviewed for this article.
What confounds the Street is that money-market funds make sense when short-term interest rates are rising. Indeed, the big asset buildup got started in 1989, when short-term rates were near 10%. But Stein kept pushing money funds aggressively as rates plummeted--while most of the industry was doing a full-court press for equity and bond funds. "Even when a Dreyfus equity fund has good performance, they don't seem to make anything of it," says Neil Bathon of Financial Research Corp.
This fact hasn't been lost on those who follow Dreyfus' stock, which has been an underperformer of late. Shares have climbed 50% since the beginning of 1988, while the Standard & Poor's 500-stock index has risen by more than 70%. Compared with its competitors, Dreyfus looks even worse: Shares in T. Rowe Price Associates Inc. are up 300% in the same period, and Franklin Resources more than 400%. As a result, Franklin's market value is now $2.5 billion, while Dreyfus is worth only $1.4 billion.
DEEP POCKETS. If Dreyfus has suffered in the short term to pursue its asset-gathering strategy, it can afford the pain. Few companies are more solid--or more liquid. The management company has reserves of $688 million in cash, marketable securities, and, of course, Dreyfus funds. And there's no long-term debt. The conservative management, say observers, has been a selling point in luring savers away from banks and thrifts, and in selling their own wares--mainly single-state municipal bond funds--through banks.
DiMartino notes that the company could reach record earnings this year: Wall Street analysts are projecting $2.46 per share. But that's only about 11% more than the 1988 level and comes after a long profit slump. The downturn was caused by the decision to subsidize expenses and waive management fees. Over the past three years, subsidieshave cost $37.2 million, and this year could cost $6 million more.
Indeed, earnings look this good only because of income from the company's cache. From 1989 through 1991, Dreyfus' pretax income came 63% from dividends, interest, and capital gains on securities. Even this year, some analysts estimate the portfolio will contribute at least 20% of the bottom line.
Dreyfus' earnings are picking up now because it has been gradually phasing in fees. On Oct. 1, it will add an additional 0.05 percentage points in management fees to the $6.5 billion Dreyfus Worldwide Dollar Fund. That will produce $3.3 million more a year. But Dreyfus still absorbs expenses and waives fees on startups, such as the three new Dreyfus BASIC money-market funds, with $542 million in assets. Those subsidies can be powerful in today's yield-starved world. While the average taxable money fund yields only 3%, Dreyfus BASIC pays more than 3.7%. The extra yield that goes to the fund investor comes out of the corporate shareholder's pocket.
"Every decision we make is looking toward the long-term best interests of the company," says DiMartino. "If short-term earnings take a hit, so be it." He says senior executives have much to lose from such hits, "since most of our compensation is based on pretax income." Yet, he says, the basis for executive pay has never been an issue in planning strategy. The Worldwide Dollar fund is a success, he argues: 75% of the customers attracted were new to Dreyfus, and 50% had never before invested in a mutual fund.
But for all the investment in building assets, Dreyfus is not the leader in money-market funds. According to Dreyfus, it has a 9.25% share of that business, up from 6.34% in 1989. But competitors are not standing still, either. It still trails Fidelity, Merrill Lynch, and Lehman Brothers, according to IBC's Money Market Insight. In fixed-income and equity funds, Dreyfus is 10th, with a 2.7% share at the end of the second quarter, according to Financial Research. Its market share slipped from nearly 3% a year earlier.
BIG HOLES. That's surprising for a company whose roots are in the stock market. But its first and still-largest equity fund, the $2.8 billion Dreyfus Fund, has been a middle-of-the-pack performer for most of the past decade and has suffered from net redemptions for years. The fund lineup also has some big holes. Global investing, where risks can be spread around the world, is one of the fastest-growing categories of funds. Yet Dreyfus has only one global equity fund and no global fixed-income products.
There are some bright spots. The infant Dreyfus Growth & Income Fund is on a tear (box, page 114), and Dreyfus Third Century Fund, a social-investing fund, has been revitalized under new portfolio managers. That fund and Dreyfus Strategic Investing were in the highest-rating category in the 1992 BUSINESS WEEK Mutual Fund Scoreboard.
Industry executives say Dreyfus needs a broader lineup of equity funds, if it is going to succeed in gathering 401(k) assets and other defined-contribution retirement plans. DiMartino says that's one reason the firm hired Fayez Sarofim, a well-known manager of corporate and public pension plans, to manage the Dreyfus Appreciation Fund. And Dreyfus recently announced a series of index-like funds as a joint venture with Wilshire Associates, a pension-fund consulting firm. DiMartino says the company is talking with a British investment manager that could result in some new global offerings.
In the final analysis, Dreyfus' fortunes will depend on how well its money-market funds fare. If the economy remains in the doldrums, interest rates will stay in the cellar, and so investors will shy away from money funds. If, however, economic growth picks up, interest rates will rebound, and investors will begin to pile into the funds. If that happens, Stein's conservative strategy will turn Dreyfus into the big winner once again.