BNY Mellon Real Return: November 2022 Fund Update

• The managers have done a good job of sheltering investors from volatility in shares 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 company shares, by giving exposure to other asset classes and adding some balance.

Manager

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.

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.

The rest of the fund 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 fund depending on their view of the world. The managers also use derivatives within the ‘stabilising layer’ which adds 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. The team also has the flexibility to invest in high-yield bonds and emerging markets which, if used, adds further risk.

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 (which is considered to be 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 some shorter time periods.

Over the past year, the managers have changed where the fund is invested. 2022 has been a difficult year for investors and the team think that this could continue into 2023. Because of their cautious outlook, they have tried to reduce the potential for further losses in the fund. At the end of 2021, around 80% of the fund was invested in the ‘return-seeking core’ – this was reduced to around 50% during 2022. Around three-quarters of this part of the fund 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 the remaining half of the fund, and this portion has also changed in line with the managers’ outlook. As government bond yields rose, the team increased investments here from zero at the end of 2021 to around 15% now. The team has also increased investments in precious metals and derivatives. The amount invested in cash and shares has reduced.

Culture

BNY Mellon is a 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.

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. They’ve invested a significant amount of time and resource into their Responsible Investment proposition in recent years, including the hire of Therese Niklasson, the firm’s Global Head of Sustainable Investment, who we have long held in high regard.

All fund managers have access to an ESG (Environment, Social and Governance) dashboard and an ESG Consensus Score tool, both of which are mostly fed by secondary sources of data.

In recent years, the firm has launched a sustainable range of funds which take ESG analysis further. This is not one of those funds though, meaning stricter rules around what companies can be invested in do not apply to this strategy compared to others run at BNY Mellon.

Overall we think ESG risks are considered in a meaningful way by the investment team for this fund.

Cost

This fund has an ongoing annual charge of 0.79%, but HL clients benefit from an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.59%. 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.

Performance

Since Hutchins’ and 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. Since the end of 2018, when Hutchins, Pataki and Warwick officially became co-managers, the fund has returned 14.17% compared to its benchmark return of 18.32%, with the IA Targeted Absolute Return sector average return being 9.09%.

The fund performed well against its benchmark until 2022. Over the past 12 months, the fund has underperformed both its benchmark and peers. Many of the investments in the stabilising layer lost value at the same time as those in the return seeking section of the fund. In a period where shares, bonds and precious metals have all lost value, it has been difficult to shelter the fund from losses. Derivatives have helped to off-set the losses in the value of their shares, and some of their currency positioning has provided positive returns. But the bulk of their investments have lost value.

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 beat its benchmark, although there are no guarantees.

Past performance is not a guide to the future. *Source: Lipper IM 31/10/2022.

Find out more about the BNY Mellon Real Return fund, including charges

BNY Mellon Real Return Key Investor Information