- The managers have done a good job of sheltering investors from volatility 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 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.
Hutchins has worked on the Real Return team at BNY Mellon for over 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.
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 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 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.
At the beginning of the coronavirus pandemic in early 2020, the managers acted quickly, reducing 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 and altering their emphasis from capital preservation, to generating returns.
Over the past year, around 80% of the fund has been invested in the ‘return-seeking core’ – this was as low as 54% in March 2020. Around 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 less than 20% of the portfolio, and over the past two years its composition has changed in line with the manager’s outlook. The team don’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 higher weighting to cash, and greater use of index put options. Put options can benefit the fund by giving the managers the option to sell the investment at a set price, so can protect the portfolio if share markets fall.
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.
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 0.80%, but HL clients benefit from an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.60%. 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.
Please note the fund's charges can be taken from capital. This increases the yield, but reduces the potential for capital growth.
On 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. We note that there is very little historical performance difference between the two indices and the change doesn’t affect how the fund is managed.
Since Hutchins’ and Pataki’s involvement began in 2010, the fund has been slightly behind its SONIA +4% benchmark*, although it's significantly ahead of peers in the IA Targeted Absolute Return sector. Since the end of 2018, when Hutchins, Pataki and Warwick officially became co-managers, the fund has returned 26.20% compared to its benchmark return of 13.18%, despite the fund making bigger losses than expected in the first quarter of 2020.
Increasing the return-seeking core relatively early in 2020 helped performance and allowed the fund to benefit from rising share markets. Over this period shares have been the biggest contributor to returns. Meanwhile the stabilising layer, which is intended to protect the portfolio in falling share markets, has acted as a drag – which it’s liable to do when the protection is not needed.
Over the past 12 months, the fund returned 7.30%*, 3.25% ahead of its performance benchmark.
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 16 -
| Nov 17 -
| Nov 18 -
| Nov 19 -
| Nov 20 -
|BNY Mellon Real Return||2.92%||-0.67%||11.20%||6.14%||7.30%|
|IA Targeted Absolute Return TR||4.05%||-2.26%||3.14%||2.74%||3.78%|
Past performance is not a guide to the future. *Source: Lipper IM 30/11/2021.
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