S&P Picks: The Dreyfus Appreciation Fund
Dreyfus Appreciation Fund Ticker:(DGAGX) ranks as an S&P five-star Domestic Equity mutual fund because of its relatively strong track record, its ownership of stocks that S&P Equity Research views on average to be undervalued and having financial strength, and S&P's view that DGAGX assumes less risk and incurs relatively low costs for its shareholders than its large-cap core peers.
Dreyfus Appreciation Fund Ticker:(DGAGX) ranks as an S&P five-star Domestic Equity mutual fund because of its relatively strong track record, its ownership of stocks that S&P Equity Research views on average to be undervalued and having financial strength, and S&P’s view that DGAGX assumes less risk and incurs relatively low costs for its shareholders than its large-cap core peers. S&P believes it is important to assess a fund’s underlying holdings in addition to its performance, risk, and cost considerations, and S&P’s holistic ranking methodology incorporates all of these analyses in establishing a mutual fund ranking.
The fund is managed by sub-advisor Fayez Sarofim & Co, a team of experienced investment professionals that have implemented a largely buy-and-hold, blue-chip portfolio for Dreyfus over the past 20-plus years. On a one-, three-, five and 10-year total return basis, the fund has outperformed its large-cap core peers through July 31. In an August interview with S&P, fund management explained that the securities chosen for inclusion in Dreyfus Appreciation are all global industry leaders that are believed to have ready access to capital, economies of scale, and opportunities to grow earnings as international markets become more mature.
Turnover of the portfolio is a miniscule 1%, helping keep trading costs low and S&P thinks management’s unchanged strategy has paid off in the first seven months of 2010, as the fund was up 0.3% versus the 1.5% average loss for its large-cap core peers. The fund also boasted a relatively high dividend yield. Unlike 2009, when the fund lagged, DGAGX has benefitted by what S&P considers as a flight to quality stocks this year amid economic and credit market uncertainty. But in light of the market volatility, S&P believes that selecting a fund just solely on past performance is fraught with risks.
A review of the fund’s latest available full portfolio as of June 2010 supports the S&P five-star fund ranking. Eight of the ten largest positions are currently ranked by S&P Equity Research as strong buy (5-STARS) or buy (4-STARS); STARS is an independent and qualitative approach to stock selection employed by S&P’s global research team. In addition, as a whole, the portfolio is deemed by S&P as incurring relatively low risk considerations, with most of the portfolio having above-average S&P Quality Rankings, a metric that assesses dividend and earnings growth and consistency, and having high investment-grade S&P Credit Ratings on its parent company. S&P Credit Ratings Services operates independently from S&P Equity Research.
As of June 2010, the fund had a 35% stake in consumer staples stocks which, in addition to being viewed as undervalued by fund management and S&P Equity Research, stand out for their strong balance sheets and history of dividend and earnings growth. Two such holdings were S&P strong buy recommended Coca-Cola and S&P buy-recommended Procter & Gamble, which also receive S&P Quality Rankings of A+. S&P believes a high Quality Ranking limits the fund’s risk profile. Fund management believes that the companies’ decades-old investment into Brazil, China, and Russia will help drive sustainable earnings as the middle classes there are emerging and consumer products are becoming “luxury” items, even as the U.S consumer spends less and the prospects for Western European macro-economies appear less certain.
The information technology holdings (13% of assets) for DGAGX are also considered by management as poised to gain from growing consumer demand outside of the United States. Management described favorably the earnings growth predictability of recent top-10 holding Apple as stemming partially from Mac sales in Asia. S&P currently has a Strong Buy recommendation on Apple and while the company is one of the few holdings that does not pay a dividend, the maker of the iPhone and the iPad had $24 billion in cash and short-term securities on its balance sheet as of June 2010, providing it with ready access for capital investment.
In addition to assessing underlying holdings and performance of funds, investors should focus on the other risk considerations and cost implications of owning a particular fund, according to S&P. Dreyfus Appreciation has a below-average beta of 0.85 and a standard deviation that is lower than its peers, signaling relatively muted volatility. Meanwhile, DGAGX has a net expense ratio of 1.1%, lower than its peer average of 1.3% and does not have a front-end sales load.
Overall, S&P Equity Research believes Dreyfus Appreciation recently held a number of high-quality undervalued securities in addition to having a track record of outperformance with limited volatility. We think the fund warrants additional investor scrutiny.
But as with all investments, S&P believes that investors should look to make selections that are suitable for their objectives and risk profiles. To learn more about the S&P fund ranking methodology, visit http://www2.standardandpoors.com/spf/pdf/equity/MFMethodology.pdf
Note: The fund rankings in this article – from five star (best) to one star (worst) – are quantitatively derived from performance, holdings, risk, and expense analysis. The stock rankings, or STARS – using a scale of 5-STARS (strong buy) to 1-STARS (strong sell) – are based on S&P equity analysts’ qualitative and fundamentally-driven outlook for the stock over the next 12 months. S&P proprietary rankings are subject to change at any time.
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