BNY Mellon Sustainable Real Return: December 2021 fund update

• The experienced Real Return team implement their time-tested strategy on this fund, but with added emphasis on sustainability
• They're one of the best-resourced teams in the sector
• We think this fund could be used to help smooth the returns of a broader investment portfolio
• 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 Sustainable Real Return fund aims to reduce volatility by providing some shelter during market wobbles, while also delivering some long-term growth in a sustainable way, by investing in companies that comply with their in-house environmental, social and governance (ESG) criteria. This means it could be a good option for a more defensive portfolio seeking steadier gains, and those who wish to invest in Responsible funds. It could also be a useful addition to more adventurous portfolios focused on shares, by giving exposure to other asset classes and adding some balance.

Manager

Matthew Brown and Philip Shucksmith have managed the fund since launch in April 2018. They're both experienced investors and have served on the Real Return team for well over a decade.

BNY Mellon's team-based investment process, however, is built on the principle that the whole is greater than the sum of its parts. The fund is managed with an investment approach that is heavily reliant upon the skills and experience of the wider Real Return investment team.

The team's built up a good track record over a long period of time with the BNY Mellon Real Return Fund, which has featured on the Wealth Shortlist (and formerly the Wealth 50 and 150) since December 2010. The team's experience and time-tested investment process gives us confidence they can deliver good returns in a sustainable way with this fund, although there are no guarantees.

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. They also consider how well those companies manage their impact on the environment and society.

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

The team places more emphasis on not losing money than 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 sell) to help achieve this, as well as derivatives, which can add risk. The team also has the flexibility to invest in high-yield bonds and emerging markets which, if used, adds further risk.

The fund's sustainable 'red lines' mean companies that violate the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption) and those incompatible with the aim of limiting global warming to 2°C are not considered for the fund. It also won't invest in companies that make more than 10% of their revenues from tobacco, alcohol, gambling and several other contentious industries. The team engages with the companies they invest in on a range of ESG issues and report on progress in their Responsible Investment Report (available on the BNY Mellon website).

The Responsible Investment team has power of veto over companies held in the BNY Mellon Sustainable Real Return Fund. This means the final decision is separated from the managers and helps provide an additional layer of challenge.

At the end of October 2021, 86% of the fund was invested in the ‘return-seeking core’ – this was just 60% during the onset of the coronavirus pandemic in March 2020. Three quarters of the return-seeking part of the portfolio is made up of shares. The rest includes corporate and emerging market bonds, as well as alternatives such as property, infrastructure, and commodities.

The stabilising layer currently makes up just over 14% of the portfolio. The team doesn’t currently have confidence in the ability of government bonds or gold to act as stabilising assets, and these have been sold from the portfolio. Instead, the stabilising layer includes a larger investment in cash, and greater use of index put options. Put options give the managers the option to sell the investment at a set price, so can protect the portfolio if share markets fall.

Culture

BNY Mellon is a very 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.

Cost

This fund is available at an annual ongoing fund charge of 0.83%, making it more expensive than the BNY Mellon Real Return Fund, which has a net ongoing charge of 0.60% for HL clients. While a slightly higher charge is to be expected for the additional sustainability analysis that goes on within this fund, we think the charge is on the high side and investors should be mindful this sets a higher hurdle for the managers to deliver positive returns. The HL platform fee of up to 0.45% per year also applies.

Please note the fund's charges can be taken from capital. This increases the yield but reduces the potential for capital growth.

Performance

From 1 October 2021 the fund’s performance benchmark changed from 1-month GBP LIBOR +4% to SONIA (30-day compounded) +4%. This is because Sterling LIBOR will cease to be published after 31 December 2021, and SONIA (Sterling Overnight Index Average) is expected to be adopted as the industry standard for representing sterling cash.

The fund's done well since launch, beating both its official benchmark, SONIA +4%, and its peers in the IA Targeted Absolute Return sector, although this is a short time period and past performance is not a guide to the future. All funds will rise and fall in value, so you could get back less than you invest.

The fund’s also done well over the past year. Over this period shares have been the biggest contributor to returns. Meanwhile the stabilising layer, which is intended to shelter the portfolio in falling share markets, has acted as a drag – which it’s liable to do when the shelter is not needed.

Past performance is not a guide to the future. Source: Lipper IM to 30/11/2021.

*Fund launched on 24 April 2018. Full year performance data prior to this date is unavailable.

Find out more about BNY Mellon Sustainable Real Return fund including charges

BNY Mellon Sustainable Real Return Key investor information