BNY Mellon Real Return: November 2023 fund update

• The managers have done a good job of sheltering investors from volatility in shares over the long run
• The team is very well resourced
• We think the fund could be a good consideration for a conservative portfolio, or bring diversification to a more adventurous one
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The BNY Mellon Real Return fund aims to reduce volatility by providing some shelter during market wobbles, while also delivering some long-term growth. This means it could be a good option for a more defensive portfolio seeking steadier gains. It could also be a useful addition to more adventurous portfolios focused on company shares, by giving exposure to other asset classes and adding some balance.

Manager

This fund is managed using a team-based approach. The two lead managers, Aron Pataki and Andy Warwick, pool together their collective skills and expertise.

Pataki joined the team in 2010 after spending four years in the firm's Portfolio Analytics team. Warwick is the newest member of the team, having joined in mid-2018, but he built up significant experience managing multi-asset funds prior to joining the firm.

Pataki and Warwick are supported by a wider team of seven investment professionals with a range of roles from portfolio managers, analysts and strategists. Each team member has differing responsibilities and areas of specialism and there is a big emphasis on collaboration between them.

We think the team is sensible, well-resourced, and has fulfilled the fund’s long-term aim of keeping volatility low.

Process

The team aims to make money in a variety of market conditions. They do this using a mix of assets that broadly fall into two camps. The first is called the 'return-seeking core'. It invests in assets the team think will provide long-term growth, such as shares and bonds issued by well-run, financially secure companies with a unique set of advantages over the competition.

The rest of the fund is called the 'stabilising layer' and invests in government bonds, commodities, cash and derivatives with the aim of adding stability to returns. The managers alter the amount invested in each section of the fund depending on their view of the world.

The managers use of derivatives, high yield bonds and assets from emerging markets all increase risk.

The team places more emphasis on not losing money than on making it. If you lose less money in the bad times, you have less ground to make up in the good times. They use diversification, hedging (investing to potentially benefit in a range of outcomes), and liquidity (investing in things that are easy to buy and sell) to help them achieve this, as well as derivatives.

While the team tries not to lose money, the assets they invest in can go down in value. They measure their performance over the long term (which is considered to be five years or longer) against SONIA (Sterling Overnight Index Average) + 4% per annum. SONIA is the rate of interest banks receive when they lend money to each other and is similar to the Bank of England base rate. While the fund aims for long-term growth, it still has the potential to lose value over shorter time periods.

Over the past year, the managers have kept the split between the return seeking core and the stabilising layer broadly similar. They have however made changes within each of these sections.

Within the return seeking core, they have reduced exposure to alternatives, while increasing exposure to emerging market bonds at the same time. Emerging market bonds look attractive following the depreciation of a number of currencies, presenting what the team feel is a good entry point.

Within the stabilising layer the team have reduced investments in derivatives, government bonds and precious metals in favour of cash. That being said, the exposure to government bonds has varied significantly over the year. The period has seen a rapidly changing outlook for government bonds as inflation and interest rate expectations have been volatile and the team have reacted to this by increasing and reducing their exposure. The increase in the cash position reflects the higher interest rates now available following the interest rate rising cycle.

Culture

BNY Mellon is a large, US-based firm so the managers have a lot of resources at their disposal. Until mid-2019 they were part of the Newton brand, but even though the name has now changed to that of the parent company, the way the managers run the fund remains the same.

In September 2021, Mellon Investments merged its equity and multi-asset teams into Newton. So far this hasn’t directly affected the managers of this fund, although it has given them access to a larger pool of research analysts who could be of benefit.

We like that the fund managers are incentivised in a way that aligns their interests with those of long-term investors. However there have been some significant fund manager departures in recent years and we continue to monitor this situation closely.

ESG Integration

The team at BNY Mellon (formerly Newton) believes responsibly managed companies are better placed to achieve sustainable competitive advantage and provide strong long-term growth. They’ve invested a significant amount of time and resource into their Responsible Investment proposition in recent years, including the hire of Therese Niklasson, the firm’s Global Head of Sustainable Investment, who we have long held in high regard.

All fund managers have access to a Responsible Investment app which centralises a variety of research providers’ data, as well as their own, to help identify material Environmental, Social and Governance (ESG) and sustainability issues for a single company. It also includes a quantitative net-zero assessment tool to support their analysis of each company’s net zero transition plans.

In recent years, the firm has launched a sustainable range of funds which take ESG analysis further. They utilise the firm’s thematic research framework to identify and exploit sustainable investment themes. Within the Sustainable range, the Responsible Investment team has the power of veto over companies held in the portfolios. This means the final decision is separated from the managers and provides an additional layer of challenge.

Overall we think ESG risks are considered in a meaningful way by the investment team for this fund. However this fund is not part of their Sustainable range.

Cost

This fund has an ongoing annual charge of 0.94%, but HL clients benefit from an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.74%. Part of the fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform charge of up to 0.45% p.a. also applies.

Please note the fund takes charges from capital, which could boost the income paid, but reduce the potential for capital growth.

Performance

Since Pataki’s involvement in the fund began in 2010, the fund hasn’t performed as well as its SONIA +4% benchmark*, although it's ahead of peers in the IA Targeted Absolute Return sector. Since the end of 2018, when Warwick officially became a co-manager, the fund has returned 14.33% compared to its benchmark return of 28.21%, with the IA Targeted Absolute Return sector average return being 12.40%. Remember though that past performance is not a guide to future returns.

Over the past 12 months, the fund has underperformed both its benchmark and peers. The two main causes of this underperformance have been derivatives held within the stabilising layer and alternative investments within the return seeking layer. The managers have been concerned about stock market falls and so had derivative protection in place during the first half of 2023. However, stock markets generally rose, which caused these derivatives to lose money for the fund. At the same time, some of the alternative investments have struggled following the steep increase in interest rates. Many of these companies have expected revenues and profits a long way into the future, which are not as valuable now that investors can get a higher rate of return from cash.

It wasn’t all bad though, with investments in company shares generally adding value over the period, as did cash and some holdings in precious metals.

This is a very short period of time over which to judge returns though and past performance is not a guide to the future. Over the longer term we think the fund has the potential to beat its benchmark, although there are no guarantees.

At the end of October 2023, the fund had a historic yield of 2.71%. Yields are not an indication of future income and are not guaranteed.

Past performance is not a guide to the future. *Source: Lipper IM 31/10/2023.

Find out more about the BNY Mellon Real Return fund, including charges

BNY Mellon Real Return Key Investor Information