Looking At Pad

Dreyfus Funds: A Closer Look at the Performance

Looking At Pad

Jack Dreyfus, also known as “The Lion of Wall Street,” founded Dreyfus Funds in New York City in 1951. A 1964 Life Magazine article attributes Dreyfus as revolutionizing the advertising of mutual funds, which were largely a part of institutional investing (i.e. pension plans).[i]

But not all news has been positive for Dreyfus throughout its over 60-year history. 2004 was a particularly difficult year in terms of public relations as they were sued for improper use of 12b-1 fees –those pesky fees that cover advertising and marketing fees of the brokers who recommend them. While the case was eventually dismissed in court, it did raise awareness of how mutual fund fees were being used within the industry. In 1998, Dreyfus also settled a lawsuit for $26 million which involved Dreyfus portfolio managers front running stock purchases and misrepresenting the investment objectives of a few of their mutual funds.

Now while Dreyfus was often referred to as a “genius” when it came to his investment acumen, the investment management firm in which he founded doesn’t necessarily highlight this aspect of him. In fact, the historical performance of his firm has been quite abysmal when compared to others. Given its innovative approach to advertising, which the fund management industry as a whole as taken off with, there isn’t much performance to back up whatever polish they decide to put on their reputation. As of March 31, 2016, their advertising machine has been able to accumulate $257.5 billion in assets under management.[ii]

We will take a deep dive into the historical performance of Dreyfus in order to better understand its luster. You can find similar analyses for fund companies such as:

Our analysis begins with an examination of the costs associated with the strategies. It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, and 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relative to incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 73 active funds offered by Dreyfus. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio 12b-1 Fee Max Front Load Global Category
Dreyfus Emerging Markets Debt Lcl Ccy A DDBAX 29.71 1.25   4.50 Emerging Markets Fixed Income
Dreyfus Ultra Short Income Z DSIGX 59.09 0.47     US Fixed Income
Dreyfus Municipal Bond DRTAX 14.65 0.72     US Municipal Fixed Income
Dreyfus New Jersey Municipal Bond A DRNJX 8.41 0.85   4.50 US Municipal Fixed Income
Dreyfus AMT-Free Municipal Bond Z DRMBX 11.76 0.46     US Municipal Fixed Income
Dreyfus Tax Sensitive Total Return Bd I SDITX 29.93 0.45     US Municipal Fixed Income
Dreyfus Intermediate Municipal Bond DITEX 13.98 0.73     US Municipal Fixed Income
Dreyfus Connecticut A PSCTX 9.75 0.92   4.50 US Municipal Fixed Income
Dreyfus Municipal Bond Opportunity A PTEBX 18.85 0.93   4.50 US Municipal Fixed Income
Dreyfus Massachusetts A PSMAX 12.60 0.95   4.50 US Municipal Fixed Income
Dreyfus Pennsylvania A PTPAX 12.49 0.96   4.50 US Municipal Fixed Income
Dreyfus High Yield Municipal Bond Z DHMBX 26.66 0.93 0.14   US Municipal Fixed Income
Dreyfus Short-Intermediate Muni Bd D DSIBX 20.92 0.59 0.10   US Municipal Fixed Income
Dreyfus CA AMT-Free Municipal Bond Z DRCAX 11.03 0.72     US Municipal Fixed Income
Dreyfus NY Tax-Exempt Bond DRNYX 12.19 0.72     US Municipal Fixed Income
Dreyfus NY AMT-Free Municipal Bond A PSNYX 24.62 0.91   4.50 US Municipal Fixed Income
Dreyfus Intermediate Term Income A DRITX 370.87 0.88   4.50 US Fixed Income
Dreyfus US Treasury Long-Term DRGBX 129.48 0.66     US Fixed Income
Dreyfus US Treasury Intermediate Term DRGIX 231.02 0.66     US Fixed Income
Dreyfus GNMA Z DRGMX 278.91 0.90 0.16   US Fixed Income
Dreyfus Short Term Income D DSTIX 94.92 0.65     US Fixed Income
Dreyfus Inflation Adjusted Sec I DIASX 53.54 0.52     Inflation Linked
Dreyfus High Yld A DPLTX 54.35 0.95 0.25 4.50 High Yield Fixed Income
Dreyfus Opportunistic Fixed Income A DSTAX 182.35 0.89   4.50 Other Fixed Income
Dreyfus Global Dynamic Bond A DGDAX 134.49 0.95   4.50 Other Fixed Income
Dreyfus International Bond A DIBAX 216.56 1.12   4.50 Global Fixed Income
Dreyfus/Standish Global Fixed Income I SDGIX 178.07 0.52     Global Fixed Income
Dreyfus International Stock A DISAX 16.52 1.26   5.75 Global Equity Large Cap
Dreyfus Diversified International A DFPAX 18.00 1.30   5.75 Global Equity Large Cap
Dreyfus/Newton International Equity I SNIEX 36.37 0.90     Global Equity Large Cap
Dreyfus International Equity A DIEAX 87.33 1.12   5.75 Global Equity Large Cap
Dreyfus Global Equity Income A DEQAX 30.89 1.28   5.75 Global Equity
Dreyfus Global Stock A DGLAX 10.82 1.23   5.75 Global Equity
Dreyfus Worldwide Growth A PGROX 5.38 1.17   5.75 Global Equity
Dreyfus Diversified Emerging Markets I SBCEX 78.32 1.46     Emerging Markets Equity
Dreyfus Emerging Markets A DRFMX 80.11 1.66   5.75 Emerging Markets Equity
Dreyfus Total Emerging Markets A DTMAX 125.89 1.60   5.75 Emerging Markets Equity
Dreyfus Growth Allocation SGALX 18.54 1.17     Aggressive Allocation
Dreyfus Conservative Allocation SCALX 16.34 0.93     Cautious Allocation
Dreyfus Moderate Allocation SMDAX 10.58 1.05     Moderate Allocation
Dreyfus Global Real Return A DRRAX 68.92 1.15   5.75 Multialternative
Dreyfus Balanced Opportunity J THPBX 114.35 0.95     Moderate Allocation
Dreyfus Dynamic Total Return A AVGAX 165.55 1.49   5.75 Multialternative
Dreyfus Technology Growth A DTGRX 67.23 1.28   5.75 Technology Sector Equity
Dreyfus Large Cap Growth I DAPIX 63.87 0.90     US Equity Large Cap Growth
Dreyfus US Equity A DPUAX 13.81 1.15   5.75 US Equity Large Cap Growth
Dreyfus Opportunistic US Stock A DOSAX 147.86 1.20   5.75 US Equity Large Cap Growth
Dreyfus Fund Incorporated DREVX 55.82 0.75     US Equity Large Cap Growth
Dreyfus Research Growth Z DREQX 53.69 0.88     US Equity Large Cap Growth
Dreyfus Growth & Income DGRIX 60.22 0.91     US Equity Large Cap Growth
Dreyfus Appreciation Investor DGAGX 5.69 0.92     US Equity Large Cap Blend
Dreyfus Large Cap Equity A DLQAX 50.77 1.09   5.75 US Equity Large Cap Blend
Dreyfus Third Century Z DRTHX 61.45 0.98     US Equity Large Cap Blend
Dreyfus Disciplined Stock DDSTX 65.96 1.00 0.10   US Equity Large Cap Blend
Dreyfus Core Equity A DLTSX 10.31 1.35 0.25 5.75 US Equity Large Cap Blend
Dreyfus Tax-Managed Growth A DTMGX 11.02 1.35 0.25 5.75 US Equity Large Cap Blend
Dreyfus Equity Income A DQIAX 65.19 1.10   5.75 US Equity Large Cap Value
Dreyfus Strategic Value A DAGVX 96.32 0.98   5.75 US Equity Large Cap Value
Dreyfus/The Boston Co Small Cap Gr I SSETX 169.20 1.00     US Equity Small Cap
Dreyfus Select Managers Small Cap Gr A DSGAX 125.11 1.30   5.75 US Equity Small Cap
Dreyfus Select Managers Small Cap Val A DMVAX 65.39 1.29   5.75 US Equity Small Cap
Dreyfus/The Boston Company Sm Cp Val I STSVX 76.23 0.97     US Equity Small Cap
Dreyfus Opportunistic Small Cap DSCVX 74.06 1.09     US Equity Small Cap
Dreyfus/The Boston Co Sm/Md Cp Gr I SDSCX 144.39 0.79     US Equity Mid Cap
Dreyfus Mid-Cap Growth F FRSPX 157.67 1.13 0.06   US Equity Mid Cap
Dreyfus Opportunistic Midcap Value A DMCVX 74.05 1.18   5.75 US Equity Mid Cap
Dreyfus Active MidCap A DNLDX 60.96 1.13   5.75 US Equity Mid Cap
Dreyfus Structured Midcap A DPSAX 78.09 1.25   5.75 US Equity Mid Cap
Dreyfus Small Cap Equity A DSEAX 77.01 1.39   5.75 US Equity Mid Cap
Dreyfus Research Long/Short Equity A DLSAX 359.78 1.75   5.75 Long/Short Equity
Dreyfus Global Real Estate Securities A DRLAX 55.84 1.30   5.75 Real Estate Sector Equity
Dreyfus Natural Resources A DNLAX 100.82 1.35   5.75 Natural Resources Sector Equity
Dreyfus Floating Rate Income A DFLAX 76.63 1.04   2.50 US Fixed Income

On average, an investor who utilized an equity strategy from Dreyfus experienced a 1.17% expense ratio, a 0.17% 12b-1 fee, and a 5.75% max front-end load for equity funds with a load. Similarly, an investor who utilized a bond strategy from Dreyfus experienced a 0.80% expense ratio, a 0.16% 12b-1 fee, and a 4.35% max front-end load for bond funds with a load. This can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance. The average turnover ratios for equity and bond strategies from Dreyfus were 74.04% and 82.78%, respectively.   This implies an average holding period of about 14 months to 16 months, on average.  It is safe to say that Dreyfus makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long term.

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Dreyfus’ “expertise.” We compare each of the 73 strategies that have at least 3 years of performance history since inception and against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found.

  • 71% (52 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
  • 29% (21 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
  • 0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

It is important to mention that these performance figures do NOT include the front-end load. If an investor paid the front-end load, their return is worse than the results we show here. Not all investors pay the front-end load depending on who sold the fund to the investor, if the fund is in a qualified retirement plan, etc. 

In general, we conclude that Dreyfus has no expectation of producing above-average returns for their investors. The vast majority (71%) of their funds didn’t beat the average since their inception. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.

Now some readers may believe that we are not properly analyzing performance since we do not take into account risk (Beta). We understand your concern. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from Dreyfus who have been around for at least the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for Beta. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2015.

As you can see, not a single fund produced an alpha that was statistically significant at the 95% confidence level (green shaded area). This is what we would expect in a well functioning capital market.

Like many of the other largest financial institutions, a deep analysis into the performance of Dreyfus has yielded a not so surprising result: active management is failing many of its investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.

The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.



[i] Smith, Marshall. “Jack Dreyfus: The Maverick Behind the Wall Street Lion.” Life Magazine, 1964. http://www.remarkablemedicine.com/magazines/1life1.html