BNY Mellon Real Return: October 2025 fund update

• The team managing the fund has been through a lot of change recently

• Despite the changes, the team remains well resourced

• The process continues to focus on losing less during stock market shocks while providing some long-term growth

• This fund no longer features 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 in an investment portfolio by providing some shelter during market wobbles, while also delivering some long-term growth. This means it could be considered for a more defensive portfolio seeking steadier gains, or for a more adventurous portfolios focused on company shares, by providing investments in other asset classes and adding some potential balance.

Manager

In May 2025 the fund’s management team went through significant change. Previous co-head of the Real Return team Andy Warwick, alongside long-standing managers Matthew Brown and Philip Shucksmith, left the fund and the business.

Ella Hoxha replaced Warwick as co-head of the Real Return team. She’s also Head of Fixed Income at Newton Investment Management. She has 22 years’ industry experience, joined Newton in 2023 and has previously worked at Pictet Asset Management, Wellington Management and Invesco Asset Management.

Aron Pataki remains as co-head of the Real Return team. As a long-standing member of the team who joined Newton in 2006, his continued involvement as a co-head of the team is a positive.

There have been a lot of other new additions to the team managing the fund. We view the addition of Nick Pope as particularly important. Pope joined Newton in 2011 as a global research analyst. He began managing funds in 2021, focusing on investing in company shares. His role within the team is to lead on decision making about which shares to invest in within the fund.

There have been a further eight analysts added to the team managing the fund, all with different areas of specialism.

We view this amount of change as significant and it’s the reason the fund was removed from the Wealth Shortlist. While the new team members have other roles and responsibilities within the wider business, meaning the Real Return fund is not their sole focus, the lead managers have a lot of resource and expertise to call upon.

Overall, while the logic surrounding the team changes seems sensible, it’s too early to tell what the potential impact will be over the long term.

Process

While the team managing the fund has been through a lot of change, the philosophy and processes around managing the fund broadly remain the same.

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 (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.

The split of investments in the fund between the return seeking core and the stabilising layer has changed a little since our last review. At the end of September 2025 71.6% was invested in the return seeking core and 28.4% in the stabilising layer. This compares to 63.7% and 36.3% respectively at the end of October 2024.

Within the return seeking core, the managers have increased the amount invested in shares and emerging market debt. Within the stabilising layer, the amount in cash has reduced.

Overall, the team’s been active in altering their investments within the fund, both before and after the changes to the management team. This is fairly typical for a fund that has such a large potential universe of investments, particularly during volatile markets.

Culture

BNY Mellon is a large, US-based firm so the managers have a lot of resources at their disposal. Newton Investment Management is owned by BNY. 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. This integration was continued in September 2021, when Mellon Investments merged its equity and multi-asset teams into Newton. This has given the team access to a larger pool of research analysts.

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. While they’ve invested time and resource into their Responsible Investment proposition in recent years, we’re disappointed to note the departure of Therese Niklasson earlier in 2025, someone we’ve long held in high regard.

A dedicated Responsible Investment team exercises the firm’s voting rights, coordinates engagement with investee companies and contributes to public debate on ESG matters. The team reports on their engagement progress in their annual Sustainability and Stewardship report, and their quarterly ‘ESG meeting activity’ report (both available on the Newton website). They also offer a voting dashboard, which provides fund-by-fund search functionality and detailed rationales for votes against management and abstentions.

All fund managers have access to a variety of tools, including a “Responsible Investment reviews” app which centralises a variety of research providers’ data, as well as their own, to help identify material ESG and sustainability issues for a single company, and a ‘net zero assessment’ tool assesses credibility of each company’s net zero transition plan. The firm has also launched a Stewardship app, a database which allows the team to better track progress on their engagement objectives, as well as outcomes from their engagement and voting activities.

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 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 0.82%, but HL clients benefit from an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.62%. 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, except in the HL Junior ISA, where no platform fee applies.

Please note the fund's charges can be taken from capital. This increases the yield, but reduces 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. The current management team only took over in May 2025, meaning it’s too soon for any meaningful performance comparison. Remember that past performance is not a guide to future returns.

SONIA + 4% per year can be a high bar for a fund that places most emphasis on not losing money during market wobbles. SONIA moves in line with interest rate changes, so when rates are higher as we’ve seen in recent years, the fund’s performance hurdle is also higher. This makes it more challenging for funds that tend to be defensively positioned.

Overall, we expect this fund won’t lose as much as stock markets during market shocks and over the long-term will generate positive returns with less ups and downs than shares.

Over the past 12 months, the fund’s outperformed both its benchmark and peers. The biggest contribution to performance has been the investments in shares. The team have been active in changing the amount invested in stock markets, having reduced investments in shares earlier in 2025, before increasing them again as details about the reality of potential US tariffs became clearer. Overall, this has worked well over the 12 months.

It wasn’t just shares that added value though, investments in bonds, cash and gold all added positively to performance over the year.

In terms of negatives, some of the derivatives the team use to provide protection in the event of a large market sell off provided a negative return.

At the end of August 2025, the fund had an historic yield of 2.70%. Yields are not guaranteed and are not an indication of future income.