Good times in fixed income redefining company

Gerald Thunelius has spent 12 years heading taxable bond funds at Dreyfus Corp. of New York and has never once been asked to pitch his company’s wares – until now. He’s in the middle of a three-month blitz of 25 cities, talking up his bond funds to brokers.

With the stock market off its record highs, it’s the first time in years that Dreyfus wants to boast about its strength in bonds and that investors want to listen.

“A year and a half ago, it became fun to be a bond guy,” says Mr. Thunelius. “It felt like it was OK to go outdoors again.”

At a time when most fund companies are struggling, Dreyfus is posting its best results in a decade.

In the first quarter of 2001, the company, long known for its strength in fixed-income and money market funds, was No. 5 among the top 50 fund companies in net sales, according to Financial Research Corp. of Boston. That’s up from 12th in 2000 and 39th in 1999.

“We happen to believe that having a balance of products makes good business sense,” says Stephen Canter, chief investment officer.

Even as it reaps the rewards of its diversity, Dreyfus is focused on bolstering its equities division as the key to long-term growth.

The company hopes to have 50% of its clients’ assets invested in stocks, up from the current 30%, within the next few years. It’s not a new goal. Mr. Canter wanted his company to clear that bar by the end of last year.

“For the long run, we feel that our equity business is not as large as we would like it to be,” says Mr. Canter.

Dreyfus, founded in 1951, was never much of a stock fund manager. During the bull markets of the 1980s and the early 1990s, Dreyfus continued to concentrate on bonds. From 1992 to 1996, assets grew by a meager 10%, while assets invested in all mutual funds grew by 163%.

That started to change at Dreyfus in 1994, when it was acquired by Mellon Financial Corp. of Pittsburgh.

To revamp the ailing fund company, the bank in 1995 brought in Mr. Canter, who had run two other mutual fund companies, and named Christopher “Kip” Condron, who had been head of Mellon’s asset management division, Boston Cos., as Dreyfus’ chairman. At the time, only 10% of Dreyfus’ assets were in equity funds.

Mr. Canter and Mr. Condron quickly launched stock funds, recruited stock money managers and emphasized those funds in their marketing. They also reworked Dreyfus’ distribution system, strengthening sales through brokerage firms and insurance companies rather than selling directly to individuals.

The most aggressive move came in mid-1998, when Mellon bought Founders Funds, a $6.8 billion manager in Denver specializing in growth stocks.

Many of the funds Dreyfus introduced, though, were conservative value funds, which failed to attract investors – who wanted their assets in tech-heavy funds.

“They don’t have many distinguished growth funds,” says Brian Portnoy, a mutual fund analyst at Morningstar Inc. “Very few fund groups have superstars across the board, but you could find many other fund companies that have more standouts than Dreyfus.”

Founders, too, has floundered under Mellon’s management. Within 18 months of its purchase, Founders’ chief executive and five of seven mutual fund managers departed.

Investors have pulled out as well, with redemptions outpacing new fund sales by $426 million, according to Financial Research.

Mr. Canter attributes much of Dreyfus’ equity problems to the recent stock market downturn. At the start of 2000, Dreyfus’ equity holdings had eclipsed 40% of assets, but they have fallen with the market.

“The bear market has pushed our plans out a bit in time,” says Mr. Canter. Ironically, having missed the equity boat has been a boon for Dreyfus recently.

Janus Capital Corp. of Denver, which specializes in growth stocks, has lost nearly $100 billion, or one-third of its assets, from its peak in 2000. As a result, the company has cut 500 employees. Putnam Investments has fired 275 employees this year.

Dreyfus’ assets, unlike those of its rivals, are rising as investors pour money into bond and money market funds. The company says it has no plans to reduce its staff.