BNY Mellon Global Income: May 2022 fund update

• Ilga Haubelt and her team hunt around the globe for the best income opportunities
• Individual company analysis is coupled with thematic and ESG research
• Global income funds, including this one, have tended to perform better than growth funds so far this year
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The BNY Mellon Global Income fund aims to grow income and capital over the longer term by investing in companies from around the world. The fund management team aims to identify the driving forces behind future growth opportunities, such as digitalisation, and then invests in companies they believe can benefit. Typically, they invest more in ‘value’ stocks which means the fund could work well alongside ‘growth’ orientated funds and provide global diversification to an income-focused portfolio.

Manager

This fund has been managed by a team of four since June 2020.

Co-manager Ilga Haubelt has been Head of Equity Income since March 2020 after joining the firm a year earlier. Haubelt entered the industry in 2005 and previously worked at German asset manager Deka Investment where she was Head of Global Equities and managed income-focused funds. She also has experience in US equities and real estate.

Jon Bell joined Newton, part of BNY Mellon, in 1995 after graduating from Cambridge University and has spent much of his time managing global and multi-asset portfolios. Bell’s time is divided between portfolio management and keeping investors updated on the fund’s activities.

Robert Hay and Paul Flood are the fund’s remaining co-managers, both of whom joined on Newton’s graduate scheme and have worked alongside Bell for over 15 years. Hay focuses entirely on this fund, whilst Flood is also responsible for managing other multi-asset funds.

All four team members have equal decision-making power, and they also make use of a large pool of global equity analysts. Given the resources available, we think the managers dedicate sufficient time to this fund.

While the co-managers have lots of experience between them, they have only worked together on this fund for under two years. We would prefer to see how the fund performs under their management over a longer period before considering it for the Wealth Shortlist.

Process

The managers believe the best way to achieve long-term growth is through the compounding (reinvesting) of dividends over time. They have a strict buy and sell discipline and any company share considered for the fund must yield at least 25% more than the benchmark – the FTSE World Index. If the yield falls below the benchmark it must be sold.

The team aims to avoid companies with unsustainable yields. As a result, they invest in ‘quality’ companies which have a dominant market position, sensible balance sheets and can generate cash. They must also understand how companies will benefit or struggle to adapt to an ever-evolving society. The managers assess if these businesses are supported by thematic tailwinds like digitalisation and the transition from fossil fuels to green energy.

The companies the managers invest in are broadly split into four buckets of ‘controversy’.

‘Troubled Compounding Machines’ form the foundation of the fund, with around 40% invested here. It consists of companies in industries that others can’t easily enter due to legal, geographical, or cost barriers for example. These may be good businesses with growth potential but are hampered by short-term obstacles which the managers are prepared to look past.

‘Ex-growth Cash Generators’ includes companies whose best days of growth might be behind them but are underrated by other investors, even though they can still efficiently generate returns. The third bucket focuses on ‘Capital Intensity’ and is home to service sector businesses such as banks and insurance firms. Finally, ‘Profitability Transformation’ tends to include more economically sensitive companies.

Most of the fund invests in developed markets, with around 88% invested in North America, Europe and the UK. It also invests in some higher-risk emerging markets, such as India and Taiwan.

Since the end of 2020, the team has held the view that inflation and interest rates will rise. Over that time, they’ve increased the fund’s investments in financials companies, which they believe could benefit in this environment. New investments include insurance company MetLife, US bank JPMorgan Chase, and Peruvian financial services company Credicorp.

On the other hand, the team has reduced exposure to tech companies, where yields have fallen and the income on offer is no longer as attractive.

Investors should be aware that charges are taken from capital, which can increase the yield but reduces the potential for capital growth. The fund invests in a relatively small number of companies and the managers also have the flexibility to use derivatives – both factors could increase risk.

Culture

Newton Investment Management is responsible for this fund and operates under the umbrella of BNY Mellon. Equity income investing is an important part of Newton’s business and, alongside this fund’s four co-managers, there are other experienced portfolio managers in the equity team, focused on different regions.

BNY Mellon is a large, US-based firm so the managers have plenty of analysts and resources at their disposal. Until mid-2019 the fund operated under the Newton banner but following a rebrand the fund has since changed to that of the parent company.

We like that the fund managers are incentivised in a way that aligns their interests with those of long-term investors. That said, there have been some significant fund manager departures in recent years, and we hope the current team will provide some stability for investors.

ESG integration

We like that BNY Mellon has invested heavily in its responsible investment capabilities. A dedicated team has responsibility for exercising the firm’s voting rights, coordinating engagement with investee companies and contributing to public debate on ESG matters. The team reports on their engagement progress in their annual Responsible Investment and Stewardship report, and their quarterly ESG report (both available on the Newton website). The ESG Report also includes some of the most comprehensive voting rationales available across the industry.

The fund management team believes responsibly managed companies are better placed to achieve sustainable competitive advantage and provide strong long-term growth. This fund is not exclusions-based, which means it can invest in any sector. That said, the managers won’t invest in companies where they believe poor Environmental, Social and Governance (ESG) management could impact the long-term sustainability of a company’s dividends. For example, they don’t view some energy companies as sustainable, and tend to avoid areas such as gambling.

There is also a ‘Sustainable’ version of this fund, which follows a similar investment philosophy and process as this fund but excludes certain industries.

Cost

The fund is normally available for an annual ongoing charge of 0.79%. We negotiated a 0.24% saving though, so it’s available on the HL platform for 0.55%. 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 fee of up to 0.45% per year also applies.

Performance

Since the current managers took over the fund in June 2020, it’s grown 31.10%* compared with 29.21% for the IA Global Equity Income sector. As always past performance isn’t a guide to future returns.

Prior to 2022, global income funds didn’t perform as well as the broader global market or funds focused on growth for several years. This is partly because the US market and technology companies with the potential for high growth performed well, but most global income funds don’t invest as much in these areas as they don’t tend to pay as much in dividends.

However, since the end of 2021, value and income-focused funds have performed better, and so far this year, the BNY Mellon Global Income fund has performed better than both the global market and average fund in the sector. Please note this is a short period on which to assess performance.

Companies that form the core of the fund have recently performed well, including utility companies and consumer staples. A lack of exposure to big tech companies that have fallen in value, such as Netflix and Meta Platforms (Facebook), has also helped.

Many companies had to cut or suspend their dividends in 2020 due to the Covid outbreak, and this means the fund’s level of income fell 10%. While the income is not quite back to pre-Covid levels, it has since grown, and the fund currently yields 2.41%. As always yields and income are not guaranteed and will change over time.

Past performance is not a guide to the future. Total returns with income reinvested. Source: Lipper IM* to 30/04/2022.

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