- The managers have done a good job of sheltering investors from volatility over the long run
- The team is extremely 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 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 equities, by giving exposure to other asset classes and adding some balance.
This fund is managed using a team-based approach. The three lead managers, Suzanne Hutchins, Aron Pataki and Andy Warwick, pool together their collective skills and expertise.
Hitchens has worked on the Real Return team for a decade, and she's amassed plenty of experience managing multi-asset portfolios in her 30 year investment career. 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 mid-2018, but he built up significant experience managing multi-asset funds prior to joining the firm.
The trio manage one other fund, which is run in a similar fashion to this one. That means they’re all focused on investing in the same way, with little else to distract them. They also have the support of the wider BNY Mellon team.
We think the team is sensible, well-resourced, and has fulfilled the fund’s long-term aim of keeping volatility low. We think Andy Warwick brings a different perspective to the team and we view him as a positive addition.
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 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 them 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 managers started the year relatively optimistic, but that all changed in March when markets faced a double whammy of unpredictable events – the start of the coronavirus crisis and a collapse in the oil price. The managers acted quickly to reduce the fund's exposure to higher-risk areas, such as shares, emerging market bonds and corporate bonds. They added to areas that have tended to hold up better during times of uncertainty in the past, including gold, government bonds and cash.
When the worst of the stock market volatility passed, the managers started adding back to the higher-risk areas at lower prices. Within the shares section of the portfolio, they added to companies across a range of industries, but with a focus on those that had performed most poorly, such as banks and energy.
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.
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.
Responsible investment is also an important part of the team's process. Each company’s environmental, social and governance issues (ESG) are considered, as they believe this can have a big influence on future returns. We're encouraged to see that the team has invested heavily in its responsible investment capabilities in recent years.
This fund has an ongoing annual charge of 0.85%, but HL clients benefit from an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.65%. This is one of the lowest fund charges within the IA Targeted Absolute Return sector. 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.
Since Hutchins’ and Pataki’s involvement began in 2010, the fund has been slightly behind its LIBOR +4% benchmark*, although it's significantly ahead of peers in the IA Targeted Absolute Return sector. Much of the underperformance occurred in 2017 as the managers admited they were too cautious. Returns improved from the end of 2018, when the trio officially became co-managers, having added more equities, high-yield bonds and emerging market bonds to the portfolio.
The fund's beaten its benchmark so far in 2020, although it didn’t shelter investors' money as well as we would have expected during the market volatility seen earlier in the year. This was partly because the team's investments in gold didn’t hold up as well as anticipated. Many investors experienced difficulties selling some of their investments, so they sold their most liquid (easy to sell) assets, including gold, to raise cash. This had a negative impact on the price of the yellow metal initially, although it's recovered well since then.
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 shelter investors' money if markets go through prolonged tumbles but lag rising markets, although there are no guarantees.
|Annual percentage growth|
| Nov 15 -
| Nov 16 -
| Nov 17 -
| Nov 18 -
| Nov 19 -
|BNY Mellon Real Return||3.9%||2.9%||-0.7%||11.2%||6.1%|
|IA Targeted Absolute Return||0.3%||4.3%||-2.3%||3.1%||2.6%|
Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2020.
Want our latest research sent direct to your inbox?
Our expert research team provide regular updates on a wide range of funds.