Who says a lion and a bear can't cohabitate?

Dreyfus of New York announced Nov. 18 it will acquire the 10 retail funds of Bear Stearns Asset Management, also of New York, for an undisclosed amount. The deal adds $4.7 billion to Dreyfus' current $170 billion mutual fund coffers; $3 billion in money market fund assets and $1.7 billion in equity and fixed-income fund assets.

It allows for Bear Stearns to gracefully relinquish the difficult job of distributing its retail mutual funds and focus on growing its institutional and private client units.

Bear Stearns has been on a wealth management quest over the past several months, hiring seasoned brokers with solid books of business as managing directors to cater to high-net-worth investors. This past March, Bear Stearns International Ltd. launched a private client service division in London to cater to wealthy investors in the U.K. and Europe.

Not Completely Out of the Loop

But Bear Stearns isn't completely out of the investment advisory business. It will continue to sub-advise three of the soon-to-be Dreyfus-branded funds.

Dreyfus is the mutual fund and asset management arm of Mellon Financial, while Bear Stearns Asset Management is the investment advisory subsidiary of the $34 billion Bear Stearns Cos. The deal is expected to close in the first quarter of 2004.

Under the terms of the agreement, three of the Bear Stearns funds with less than stellar track records, will be merged into already existing similar Dreyfus funds. These include an international fund, a high-yield fund and a small-cap fund. Bear Stearns confirmed that the former managers of these funds would no longer manage these funds but could be reassigned elsewhere within the company.

A fourth fund, a core bond income fund, is expected to meet the same fate, but the Bear Stearns' funds' board of directors had not yet met to consider the Dreyfus acquisition.

Another four of the Bear Stearns equity funds will transition over to become new Dreyfus-branded funds. These include the Bear Stearns Intrinsic Value Fund and the Bear Stearns Alpha Growth Fund, as well as both the S&P STARS Fund and smaller-cap sibling S&P STARS Opportunities Fund. Both STARS funds rely on the Standard & Poor's Stock Appreciation (STAR) Ranking System, buying those stocks S&P awards five stars and shorting one-star stocks.

"These are the funds that we felt would fit in with our lineup to fill out our product line," said Charles Cardona, a Dreyfus vice chairman.

Three of the funds -- all but the S&P STARS Opportunities Fund -- will continue to be managed on a daily basis by Bear Stearns, which has signed a sub-advisory agreement with Dreyfus. The S&P Stars Opportunities Fund will become a new fund, but will be managed proprietarily by Dreyfus, Cardona added.

In addition, the Bear Stearns Prime Money Market Fund will join the Dreyfus family of funds, and the Bear Stearns U.S. Dollar Cash Reserve Fund, an offshore money market fund, will be merged into the offshore Dreyfus-managed Universal Liquidity Plus Fund.

Those money funds bring Dreyfus another $3 billion in assets at a time when the firm has been focusing on building its non-money fund capabilities and separately managed account programs. Still Dreyfus remains among the 10 largest money fund sponsors (see accompanying chart).

Distribution an Achilles Heel

So what drove the Dreyfus/Bear Stearns fund group acquisition? In a word: distribution. Or the lack of it.

Bear Stearns had been relying on a group of external and internal wholesaling employees to distribute the funds to broker/dealers as well as its own Bear Stearns representatives, said Barry Sommers, senior managing director of Bear Stearns Asset Management.

"We have been successful at managing money, but decided to outsource the distribution to an organization with a superior distribution network," he said. He conceded that Bear Stearns' salesforce is one-tenth the size of Dreyfus' distribution network. "We feel that we will raise more assets than with the current distribution, but it was important for us to retain the subadvisory [component]," Sommers added.

Bear Stearns had seen significant net new flows into its stock and bond funds through 2000, the first year of the recent bear market, according to Financial Research Corp. (FRC) the Boston data provider. But net flows slowed in 2001, then reversed and turned negative in 2002. The funds lost over $309 million in 2002, and have lost another $123 million year-to-date 2003, according to FRC.

"We are not exiting the retail mutual fund business. We are just exiting the distribution business," Sommers said.

While Bear Stearns has focused on wholesale distribution to brokers/dealers including some of the super-regional broker/dealers, Dreyfus has much wider distribution. Dreyfus's channels encompass the wirehouses, bank and insurance firms, as well as independent financial planning outfits such as LPL Financial and American Express Financial Advisors.

Let's Talk Money Funds

The arrangement with Bear Stearns actually began some time ago, when the two firms began discussing the notion of Dreyfus managing Bear Stearns' money market funds under a private-labeling deal, Cardona said

"We are a large player in the money market fund business and particularly institutional money market funds," he said. But the discussions then broadened to include the other $2 billion in their long-term funds, he said.

Bear Stearns was a bit of a latecomer to the mutual fund party. It launched its first four mutual funds in April 1995, among those its S&P STARS fund, which soaked up the lion's share of assets. Other funds followed. But with the market correction of 2000 and struggles in attracting assets, that initial money fund meeting eventually led to the process of looking at all of the funds, Cardona added.

The Bear Stearns funds are not the only funds Dreyfus has shopped for in recent months. Several weeks ago, Dreyfus agreed to acquire the Thompson Plumb Balanced Fund, managed by Thompson Plumb & Assoc. of Madison, Wisc., and it expects to merge it into its own balanced fund after the beginning of 2004. In October, Thompson Plumb announced that its two partners were calling it splitsville, and each was taking a portion of the whole firm, its mutual funds and separately managed accounts.

Dreyfus may be on the prowl for additional acquisitions. "If we feel we have a gap, we look for opportunities," said Cardona, who added that his wish list for 2004 may include a large-cap growth fund.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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