Objective and strategy

The fund seeks long-term capital appreciation consistent with the preservation of capital. In general it invests in a fairly compact portfolio of multinational, megacap names. The portfolio’s smallest firm is valued at $10 billion and it won’t even consider anything below $5 billion. The managers start by identifying the most structurally attractive sectors, those with the most consistent long term growth prospects. They then look for the leaders in those sectors, which tend to be large, mature and financially stable. They then buy those stocks and hold them, sometimes for decades; annual turnover is frequently 1%.

Adviser

Fayez Sarofim & Co. Fayez Sarofim was founded in 1958 by, well, Fayez Sarofim. It’s a Houston-based, employee-owned firm that manages about $28 billion in assets. It serves as the subadviser to several mutual funds, including Dreyfus Appreciation (DGAGX), Core (DLTSX), Tax-Managed Growth (DTMGX) and Worldwide Growth (PGROX).

Managers

Fayez Sarofim, Gentry Lee, Jeffrey Jacobe, Reynaldo Reza and Alan Christensen. Mr. Sarofim is the firm’s Chairman, Chief Executive Officer and Chief Investment Officer while the others are, respectively, his president, CIO, vice president and COO.

Strategy capacity and closure

Undisclosed. Dreyfus Appreciation owns 61 stocks, the smallest of which has a $10 billion market cap. That implies a $30 billion strategy capacity, assuming that the firm wants to own no more than 5% of the outstanding shares of any corporation. Institutional constraints might dictate a lower capacity, but there’s been no commentary on those.

Active share

Undisclosed. We presume that the portfolio statistics for Sarofim will parallel those for Dreyfus Appreciation but Dreyfus hasn’t disclosed the active share for the fund. They published “The Case for Active Share Analysis” (2014), part of their “Sales Ideas” series for advisers, but chose to provide the active share for only five of its 88 funds. Given the fund’s high R-squared (91) and focus on huge multinational stocks, it is unlikely to have a high active share.

Management’s stake in the fund

None yet recorded. Mr. Sarofim has over $1 million in both of the Dreyfus funds that he co-manages. Mr. Lee has between $50,000 – $100,000 in both. Mr. Jacobe has between $1 – $50,000 in both.

Opening date

January 17, 2014.

Minimum investment

$2,500

Expense ratio

0.70%, after waivers, on assets of $105 million (as of July 2023). There’s also a 2% redemption fee on shares held 90 days or less.

Comments

Fayez Sarofim & Co. mostly manages the personal wealth of very, very rich people. Like many such firms, it’s faced with “the grandchild problem.” What do you do when one of your investors, who might have entrusted a hundred million to you, asks you to work with her grandkids who might have just a paltry few tens of thousands to invest? The most common answer is, very quietly, to open a mutual fund or two to serve those younger family members. Such funds are normally available to the general public but are rarely advertised.

Because those funds are offered as a service to their clients, the advisor has no incentive to attract bunches of assets or to pad their fees (gramps would not like that). They are, on whole, a quiet bunch.

For years, Fayez Sarofim & Co. has had a productive, amicable relationship with Dreyfus, four of whose funds they subadvise. The most notable of those is Dreyfus Appreciation (DGAGX). DGAGX is the most visible manifestation of Mr. Sarofim’s mantra, “buy the best companies and hold them forever.” The fund has a sort of ultra-blue chip portfolio topped with Apple, Exxon, Philip Morris, Coca-Cola, Chevron and Johnson & Johnson. Heck, you even know the smallest and most obscure names they hold: News Corp, 21^st Century-Fox, and Whole Foods.

It is not a flashy portfolio. It is, however, one finely attuned to the needs of really long-term investors. By Morningstar’s calculation, “While the fund’s 10-year returns don’t look great right now, on a rolling basis its 10-year returns have beaten the large-blend category 87% of the time under the current team. It has done this with significantly less volatility than its average peer, so its returns look pretty good on a risk-adjusted basis.”

Sarofim Equity was very, very quietly launched in January 2014 to serve the needs of Sarofim’s lower-paid staff and its investors’ friends and family. How quietly? The fund not only doesn’t have a webpage, its existence isn’t even acknowledged on the Sarofim & Co. site. Morningstar’s link to the fund still points to another company, weeks after we mentioned the glitch to them. There’s no factsheet, no news release, no posted letters. A Sarofim executive stressed to me last year that they have no interest in competing with Dreyfus, their long-time partners, or drawing attention from the Dreyfus funds they subadvise. They just want a tool for in-house use.

This, however, an attractive fund. Sarofim Equity is likely to differ from Dreyfus Appreciation in only two material ways. First, it’s likely to hold the same stocks but not necessarily in exactly the same weightings. It’s a question of what’s most attractively priced when money flows in, and some of the Dreyfus holdings were established decades ago. At last check, both the top five and top ten holdings were the same names in slightly jumbled order. Second, Sarofim Equity is cheaper. Sarofim charges 71 basis points, Dreyfus charges 94.

Bottom Line

Dreyfus Appreciation has been a consistently solid choice for conservative investors looking for exposure to the world’s best companies. Given the firm’s investment strategy, “small and nimble” isn’t a particular advantage for the new fund. Less costly is.

Fund website

There isn’t one. You can, however, call the fund’s representatives at 855-727-6346. Barron’s wrote a nice profile of the 85-year-old Mr. Sarofim, “A Lion in Winter,” in 2013 (Google the title to find access). In one of those developments that make me smile and look out the window, Mr. S. married his son’s mother-in-law in the summer of 2014. 

Prospectus