Last August, when Mellon Bank Corp. made its ground-breaking purchase of mutual fund manager Dreyfus Corp., critics predicted the banking company would botch the deal.

The $1.8 billion price was said to be so high that the bank company couldn't get a good return. The timing was said to be bad, since Mellon got a bond-fund specialist in a year of spectacular bond losses. And culture clashes were reported, as reputedly stodgy bankers took over a marketing- driven investment house.

But seven months later, Mellon seems to be proving the critics wrong. A new management team is winning praise from Wall Street, mutual fund assets are growing, and analysts are looking for Dreyfus to help bolster Mellon's bottom line this year.

"Mellon is revitalizing Dreyfus," proclaimed Dennis F. Shea, bank stock analyst with Morgan Stanley & Co., New York. He rates Mellon as the best buy among bank stocks he covers.

The praise is a welcome change for Mellon senior managers, who have been preaching to an often skeptical investment community that the Dreyfus deal would pay off.

Their credibility was hurt last year when bond markets plummeted because of rising interest rates. This caused investors to pull money from Dreyfus' fixed-income and money market funds - which hold 80% of the assets in the Dreyfus family.

The fund family ended 1994 with $65.9 billion of assets, $10.7 billion less than at the start of the year.

But now that interest rates have stabilized, investors are coming back. According to mutual fund researcher Strategic Insight, New York, Dreyfus assets had risen by March 30 to $71.8 billion, $3 billion more than when Mellon bought the company.

"We're very pleased with the momentum that is building," said Steven G. Elliott, Mellon's chief financial officer.

Analysts said there's more to it than a turnaround in bond markets. The word is that Mellon-picked executives are reinvigorating Dreyfus.

Howard Stein, Dreyfus' chairman and chief executive for the past quarter century, and his lieutenant, Joseph S. DiMartino, are held in high regard for building Dreyfus into one of the country's biggest mutual fund companies.

But in recent years they stumbled, industry experts say, by keeping Dreyfus wedded to bond and money market funds when stock funds were proving popular and more profitable to run.

"They were losing market share and (were) positioned in the least lucrative end of the market," said Kurt Cerulli, principal of a Boston- based investment sales consultancy that bears his name.

Mr. Stein is still the top dog at Dreyfus. But, according to Mellon officials, he is not involved in day-to-day management of the fund family.

Instead, Dreyfus is run by Robert E. Riley, a former Prudential Insurance Cos. executive who succeeded Mr. DiMartino as president in January.

Mr. Riley reports to Mellon vice chairman W. Keith Smith. His chief lieutenants are Mellon men who moved to Dreyfus in August - vice chairman Lawrence S. Kash and chief financial officer Paul Snyder.

In a private meeting with analysts and investors last week in New York, all these officials were on hand to explain their plans for Dreyfus. Analysts in attendance said the Dreyfus officials made it clear that a top priority is growing the equity component of the Dreyfus funds.

To that end, Dreyfus is looking to hire a chief investment officer who will have investment strategy duties previously held by Mr. Stein and Mr. DiMartino. This chief investment officer also will be asked to hire about a dozen portfolio managers and analysts, most of whom are supposed to be equity experts.

Mellon has already taken steps to exploit synergies that were said to be a key part of the merger. For instance, late last year, Mellon merged its relatively small Laurel mutual fund family into the much bigger Dreyfus family. This gave a modest boost to the equity strength of the Dreyfus family while cutting back-office costs for the Laurel funds.

Additionally, last year Mellon combined the 401(k) businesses of Dreyfus and Mellon. This created what experts said was a stronger service, with a diverse offering of funds and strong back-office capabilities.

"They're doing exactly what I think they should be doing," said George A. Bicher, a New York-based bank stock analyst with Alex. Brown & Sons.

Karen Talley contributed to this article.

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