The Dreyfus Corporation

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The Dreyfus Corporation

200 Park Avenue
New York, New York 10166
U.S.A.

Telephone: (212) 922-6000
Toll Free: (888) 271-4994
Fax: (212) 922-7533
Web site: http://www.dreyfus.com

Wholly Owned Subsidiary of Mellon Financial Corporation
Incorporated: 1946 as Dreyfus & Co.
Employees: 1,987
Sales: $360 million (1999 est.)
NAIC: 523920 Portfolio Management

A subsidiary of Mellon Financial Corporation, The Dreyfus Corporation is a leading mutual fund company, managing some $158 billion in more than 200 mutual fund portfolios. Products include both load and no-load mutual funds, individual retirement accounts, and variable and fixed annuities. They are sold through brokers, financial advisors, banks, and fund supermarkets. The Dreyfus name, and its corporate symbol of a lion, are well known, the result of an innovative spirit that drove the firm in its early years and played an instrumental role in establishing the mutual fund industry. After falling out of touch with the marketplace in the 1980s, Dreyfus was acquired in 1994 by Mellon, which has struggled to return the firm to its former glory.

Jack Dreyfus: Mediocre 1930s Academic Career

The man behind the Dreyfus name was Jack Jonas Dreyfus, whose life seemed ill suited to prepare him to play such an important role in the development of the mutual fund industry. He was born in 1913 in Montgomery, Alabama, the son of a candy salesman who worked for a family enterprise, The Dreyfus Brothers Candy Manufacturing Company. A middling student more interested in golf than books, Dreyfus ventured north for college, to Pennsylvania's Lehigh University where a cousin was a student. It was an engineering school, a field for which he was hardly suited. Instead he decided to major in Latin and only switched to Economics because he considered it less demanding. Other than receiving an A in Music Appreciation, Dreyfus maintained that he was a straight C student at Lehigh—as well as captain of the golf team. He wrote in his autobiography that in 1934 he graduated "Summa Cum Ordinary."

With no particular career in mind, Dreyfus returned home to live with his family, which was then relocated to New York City because of his father's work. His father suggested he try selling insurance, thinking a gift for playing golf might prove useful. Dreyfus gave it a try, but quit after one embarrassing attempt to sell an annuity to a potential customer, suffering through a dozen rounds of the man's inept golf game. His father next decided the young man should give the candy industry a try, and Dreyfus was sent to learn the ropes at Edgar P. Lewis & Sons, a Massachusetts candy factory. After six months he went on the road with his father to gain some sales training, but after several months of driving the car and carrying the samples, it became obvious that candy was not to be his calling either. Next, an uncle secured a job with an industrial designer, but here too Dreyfus failed to catch on and he quit after a few months.

Another passion of the young Dreyfus was playing bridge. It was while he was spending an evening at a Manhattan bridge club that another player suggested he try the brokerage business and made an appointment for him with the firm of Cohen, Simondson & Co. Hardly keen about the idea of a Wall Street career, Dreyfus, perhaps because he was accompanied by his father, kept the appointment, and to his surprise was hired as a broker's assistant at a salary of $25 a week. Only later would he learn that his father paid 20 weeks of his salary in advance. One of the young man's tasks was to create weekly charts, something that he actually liked and kept him interested in the job. After six months he passed his stock exchange test and became a junior customer's broker. But he was not comfortable as a salesman, drawing most of his business from relatives. After a few years he applied to be a full customer's broker at Bache & Co. and was rejected. Then in 1938 he managed to land a position at E.A. Pierce & Co., which later became Merrill Lynch. The hours suited him, since the stock market at that time opened at 10:00 and closed at 3:00, allowing him to head for his favorite bridge club in the middle of the afternoon.

Founding Dreyfus & Co. After World War II

When the United States entered World War II in late 1941, Dreyfus, despite being classified 4-F by the draft board, volunteered for the Coast Guard. His stay was brief because of a bad back, he was soon discharged, and he returned to his job at Merrill Lynch. A short time later, however, a specialist on the New York Stock Exchange was impressed with the way Dreyfus played gin rummy, and suggested that he might do well on the trading floor. Dreyfus scraped together the money needed to buy an Exchange seat, taking on a friend, Jerry Ohrbach, and his father, Nathan, as limited partners of Dreyfus & Co., formed in 1946. John Behrens also became a partner and took care of business in the office while Dreyfus traded on the floor of the Exchange, executing orders for Bache & Co. and trading on the firm's own small account. Despite a bear market, the new firm with capital of just $100,000 managed to clear $14,000.

At the behest of the Orbachs, Dreyfus acquired a brokerage firm, Lewisohn & Sons, but when the partners soon left Dreyfus was forced to leave the trading floor, where he had been doing well, and return to the office to manage the brokerage firm, for which he was unprepared. Business was so poor that Dreyfus turned to advertising the firm out of necessity. Unhappy with the dull approach of Wall Street advertising agencies, Jack Dreyfus switched to a new and more imaginative shop, Doyle, Dane & Bernbach, and because his budget was so limited he took to writing his own advertising copy. In his attempt to produce ads that he thought would be enjoyable while offering advice, he wrote copy to fit the cartoons his account executive offered to him. For example, a picture of a French poodle sitting like a mistress before a chest of jewels was wedded to a headline, " 'Pets' Can Be Expensive," and copy that read: "Too often investors become sentimentally attached to stocks that have done well for them in the past. These 'pets' can be expensive if they are allowed to prejudice sound judgment."

What Jack Dreyfus did not expect was that his ads, which ran in the business section of the New York Times, caught the ideals of customer's brokers, who began to apply for jobs. He made sure to run ads announcing new hires, which not only helped the broker to retain clients but also prompted other brokers to seek employment at Dreyfus & Co., bringing with them a great deal of business and receiving partnerships in return. Although he was just 33, and in many ways not qualified for the post, Jack Dreyfus became the managing partner of a growing firm.

One of the people who sought to become a customer's broker at Dreyfus was John Nesbett, president of a small and struggling mutual fund. Jack Dreyfus had been interested in managing a mutual fund for some time and reached an agreement to take over the fund, which changed its name from the Nesbett Fund to the Dreyfus Fund. It was just a $500,000 fund and took Dreyfus some five years to grow to the $1 million level, costing the firm a good deal of money along the way. To promote the fund, Dreyfus hired Frank Sweetser, who soon suggested that the logo be changed from a DF to a picture of a lion. Later, while lunching with his advertising account executive, Jack Dreyfus suggested the agency make a TV commercial for the fund using a live lion. The resulting spot, featuring a lion emerging from a Wall Street subway stop, was highly successful and ran thousands of times. Jack Dreyfus's iconoclastic ways led to other developments that separated the Dreyfus Fund from the competition. He wrote the nontechnical part of the prospectus, drawing praise from Barron's. He then arranged to have the entire prospectus printed as a supplement in the Sunday New York Times.

In the beginning, because the management fee of the fund was so small—.5 percent of $500,000, or $2,500—Jack Dreyfus and an assistant ran the fund, and continued in that way for a dozen years. They did well, as the Dreyfus Fund solidly outperformed other mutual funds during this period. Jack Dreyfus believed in being flexible and a willingness to quickly cut losses. The one stock on which he took a long-term approach was Polaroid. His brother-in-law was the head of the company's research department and told him about some 3-D glasses in development. Dreyfus bought the stock because of the glasses but took a large position because of the company's camera. Polaroid became an early major success story for the Dreyfus Fund.

New Leadership in the Mid-1960s

In 1958 Jack Dreyfus began to suffer from bouts of depression that ranged from mild to severe. In 1963, on little more than a hunch, he asked his doctor to prescribe Dilantin, a drug to treat epilepsy. Dreyfus improved dramatically and although he returned to his routine at Dreyfus & Co. and the Dreyfus Fund, an increasing amount of his time and attention was devoted to researching and championing Dilantin. In 1965 he decided to retire from managing the fund in order to establish the Dreyfus Medical Foundation. He hired a recruiter who presented him four candidates, but in the end he decided that someone in his own organization was better suited to the job, Howard Stein, who would head the company for the next 30 years and propel the fund to new heights. Within a few years, Jack Dreyfus retired from his business activities to devote all of his time to his medical interests. In his autobiography, he offered a lighthearted assessment of his business career: "It would appear I had some luck. The Ohrbachs pushed me into the commission business, the Dreyfus Fund walked into the office, and I bought the right stock for the wrong reason. . . . I was an implausible person to have made a lot of money."

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Never having gone to college, Stein sought opinions from countless people, but he relied on his own instincts when it came time to make investment decisions. An amateur violinist, he had a sense of counterpoint, bucking the trends to the benefit of the Dreyfus Fund and its investors. The Fund's growth was dramatic: In 1965 assets increased from $800 million to $1.34 billion. In October of that year, Dreyfus Corporation, manager of the Dreyfus Fund, also went public, selling two million shares at $20 a share, thus becoming one of the first money management firms to turn to the stock market for additional capital. After Jack Dreyfus retired, Stein took over as chief executive officer and chairman of Dreyfus Corporation in 1970.

During the 1970s Stein tried to keep in step with the times. In 1972 Dreyfus introduced The Dreyfus Third Century Fund, pioneering the concept of socially responsible investing. During this period of difficult economic conditions and a bear market, he also sensed that investors were looking for safe, dependable returns. Thus, in 1974, Dreyfus introduced the first direct-marketed, no-load money-market fund. As a result, in just one year Dreyfus saw its assets grow by 50 percent to $3 billion. Even as the stock market began to rebound, Stein became even more focused on money-market and bond funds. Politically connected, Stein, who had been campaign treasurer for Eugene McCarthy's bid for the presidency in 1968, turned his attention to Washington and succeeded in creating tax-free municipal funds, which Dreyfus launched in 1976.

In the 1980s Dreyfus tried its hand at banking. In 1982 it paid $2.8 million to buy Lincoln State Bank in East Orange, New Jersey, creating Dreyfus Consumer Bank to become involved in consumer lending. Because of changes in law that limited the growth of such banks, Dreyfus sold the branch in 1989. On the other hand, it took advantage of changes made by the Tax Reform Act of 1986 to introduce a pair of strategic funds, which made use of hedging with futures and options contracts, sophisticated trading techniques that the law now made available to mutual funds. Also during the mid-1980s, Dreyfus introduced a number of low-expense cash management funds, and the Premier Family of loan funds sold exclusively through banks and broker-dealers. Late in the decade, the firm also launched the Dreyfus WorldWide Dollar Money Market Fund, which offered a chance to invest in foreign money market instruments. Also of note, Dreyfus Corp. completed a secondary stock offering in 1986 that raised $204 million, but instead of using the money to grow through expansion and acquisitions, Stein elected to hold on to the cash. This decision, considered a misstep by many, was compounded by his reluctance to shift from bonds to equities during the post-1987 bull market.

Convinced that stocks were overvalued and would eventually be punished, Stein continued to emphasize bonds, missing out on gains in the stock market during the early 1990s and losing market share in the process. Dreyfus and Stein, its 67-year-old chairman and CEO, were considered out of step with the times. Nevertheless, the Dreyfus history and brand recognition were strong enough to attract the attention of Pittsburgh-based Mellon Bank Corporation, which like other banks was eager to enter the mutual fund business. The two firms began discussing a sale of Dreyfus to Mellon in 1993. Talks broke off in November when Stein feared that Mellon was going to make wholesale terminations and other changes, but negotiations were revived when Mellon's chairman, Frank V. Cahouet, flew to Stein's California home the day before Thanksgiving to spend time with Stein, a longtime friend. The negotiations were put back on track and culminated in a stock swap valued at $1.7 billion.

Stein stayed on as the chairman of Dreyfus, but the transition to Mellon ownership was far from smooth. The hope was that Mellon would provide a strong retail outlet for Dreyfus products, but it failed to materialize because of a clash between Mellon people and Dreyfus people, resulting in a 15 percent drop in assets in the first year. The bank was not pleased with the firm's continued conservative approach, leading to changes in the top ranks of management, including the retirement of Stein in August 1996. Mellon installed one of its rising stars, Christopher M. Condron, named president and chief operating officer in November 1995, to turn around Dreyfus. He was joined by chief investment officer Stephen Canter and they set about fleshing out the types of funds Dreyfus had to offer. In 1996 it established the Dreyfus Short-Term High-Yield Fund and two years later created the firm's first high-yield closed-end fund. Dreyfus also displayed a new aggressiveness in 1998 when it acquired Denver-based Founders Funds, a $6.8 billion-in-assets manager specializing in growth stocks. Nevertheless, the company remained conservative compared with the competition. From the time Mellon took over until 2001, Dreyfus had more of its funds redeemed than bought, by the tune of $426 million.

To make matters worse, the reputation of the firm was tarnished in 1998 when a portfolio manager of two Dreyfus funds, Michael L. Schonberg, ran afoul of regulators as well as the FBI. He was accused of accepting inexpensive stock or warrants on companies whose share he would later buy for Dreyfus's Aggressive Growth and Premier Aggressive Growth funds. Dreyfus was investigated for the way it advertised the two funds, accused of failing to adequately inform investors about the risks or to note that the fund's initial performance was skewed because it included a large number of initial public offerings. In May 2000 Dreyfus agreed to pay $2.95 million to settle the matter, and Schonberg agreed to pay a $50,000 fine and accept a nine-month suspension from the investment management business. Under terms of the settlement neither party acknowledged any wrongdoing. As a whole, the mutual fund industry, which had enjoyed a clean reputation for many years, was losing some of its luster as New York State Attorney Eliot Spitzer began to look into industry practices that may not have been in the best interest of ordinary investors. Thus Dreyfus faced a number of challenges as it struggled to regain its once lofty status in the marketplace.