This month’s pick: Dreyfus Appreciation Fund

This month’s Featured Mutual Fund of the Month is Dreyfus Appreciation Fund [Ticker:(DGAGX), $32.48 at close of business on January 29, 2009] which carries Standard & Poor’s highest ranking of five star. Based on an evaluation of the fund’s holdings, Standard & Poor’s classifies DGAGX as a Domestic Equity-Large Cap Core Fund. We believe it is important to assess a fund’s underlying holdings in addition to its performance, risk and cost considerations, and S&P’s unique ranking methodology incorporates all of these analyses in establishing our rankings.

Dreyfus Appreciation Fund is managed by sub-advisor Fayez Sarofim & Co, a team of experienced investment professionals that have implemented a largely buy-and-hold, tax-conscious blue-chip investment strategy for Dreyfus over the past 20-plus years. The fund, which own stocks of industry dominant companies with global operations that management believes can generate above-average earnings growth, has outperformed its peers on a three-, five- and 10-year basis, although in the 12 months ended January 29, it underperformed.

Further helping the S&P ranking, the fund’s turnover and expense ratio are below peer averages, and its standard deviation is relatively low. The fund also invests in a large number of stocks that we deem as undervalued based on S&P STARS, and of high quality according to other Standard & Poor’s analytical measures.

In seeking out this month’s Featured Fund, we screened for five-star domestic equity funds that scored positively for risk considerations and cost factors. We also looked for funds that underperformed throughout 2009 but that recently owned stocks viewed favorably by S&P Equity Research, since past performance is not necessarily indicative of future results.

Within Performance Analytics, as of January 29, Dreyfus Appreciation was in the second quartile for total return of its large-cap core peer group on a three-year basis, but in the bottom quartile on a one-year basis. In 2009, the fund generated a 21% total return, which trailed its 27% peer average; in the first four weeks of 2010, the fund’s total return was ahead of its peers. While not part of the S&P ranking, the fund’s five-year track record was in the second quartile. As of the latest available holdings from the end of September, the fund’s 56-stock portfolio was viewed on average as attractive by S&P Equity Research, utilizing the qualitatively based S&P STARS methodology, which leverages the independent research of S&P Equity analysts who, collectively, have recommendations on approximately 2,000 global stocks. The fund’s top-10 holdings also included four stocks that are viewed as undervalued based on S&P’s Fair Value Ranking.

The fund’s management includes a nine-member investment committee led by Fayez Sarofim that selects the portfolio’s holdings with the help of an analytical team dedicated to the strategy; Dreyfus plays no active role in the management of the fund. The securities chosen for inclusion are all global industry leaders with strong balance sheets that management believes have ready access to capital, economies of scale and opportunities to grow earnings as international markets become more mature. Some of these holdings have been in the portfolio for nearly a decade or longer as management is content to let winning stocks ride to as high as 7% of assets; when a new stock is added there are expectations that the shares have catalysts for at least the next three years. Many of these stocks, such as Coca-Cola [KO 54*****], Exxon Mobil [XOM 64 *****] and Intel [INTC 19 ****] are also independently considered attractive and of high quality by S&P Equity Research.

Based on our model, Dreyfus Appreciation Fund’s Risk Considerations stand out among other Domestic Equity funds. The S&P Quality Rankings of the fund’s holdings, a measure we use to assess historical earnings and dividends, are above average when compared to other Domestic Equity funds and the top-10 holdings include four stocks that receive the highest ranking of “A+”, viewed by S&P as low risk. In addition, many of the companies owned have above-average credit profiles according to S&P Credit Ratings Services, which operates independently from S&P Equity Research Services. We think this lower risk profile is consistent with the characteristics one would expect for a fund that intends to invest in “industry dominant companies with strong balance sheets and above-average earnings growth”.

The fund’s standard deviation was below peers, which we believe bodes well for the consistency of returns, while its Sharpe ratio is slightly worse than average. The fund is actively run by Mr. Fayez Sarofim, who has been at the helm of DGAGX since 1984. He works with a number of senior investment professionals at Fayez Sarofim & Co, an employee-owned asset manager, including Catherine Crain, who serves as a co-portfolio manager for the fund and whom we interviewed for this report.

We also think that a focus on Cost Factors is important before selecting a mutual fund. DGAGX scored positively compared to its peer group for the absence of a front-end sales load. In addition, the fund’s buy-and-largely hold investment style has resulted in a favorable and significantly below-average 7% turnover rate. Meanwhile, the fund’s net expense ratio of 0.97 was below its large-cap core average of 1.29.

The minimum initial investment for DGAGX, which has approximately $2.3 billion in assets under management, is $2,500. Assets under management are down nearly 50% since the end of 2007, due in part we believe to the underperformance in 2009.

S&P Mutual Fund Ranking Background
In September 2009, S&P upgraded its method of ranking mutual funds to leverage the analytical strength of S&P Equity Research, including STARS and S&P Quality Rankings. To that end, we do not look only at past performance. We also evaluate the holdings in the portfolio and various risk and cost considerations. For more details on the S&P Mutual Fund Methodology, visit http://www2.standardandpoors.com/spf/pdf/equity/MFMethodology.pdf.

Standard & Poor’s Equity Research offers in-depth information for financial advisors on all ten sectors, hundreds of industries, and thousands of stocks, mutual funds, and exchange-traded funds through its MarketScope Advisor platform. For a free 14-day trial, go towww.getmarketscope.com , or call 1-877-219-1247, or send an email to [email protected].

Related Topics: Featured Fund Of The Month