- 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 ESG criteria. This means it could be a good option to consider for a more defensive portfolio seeking steadier gains, and investors 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.
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 give us confidence they can deliver good returns in a sustainable way with this fund, although there are no guarantees.
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 any company that makes more than 10% of its revenues from tobacco. The team engages with the companies they invest in on a range of environmental, social and governance (ESG) issues and report on progress in their Responsible Investment Report (available on the BNY Mellon website).
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. Recent investments include Home REIT, which launched in October 2020. The trust is dedicated to fighting homelessness by acquiring and building new accommodation in conjunction with local and central government.
BNY Mellon is a very large, US-based firm so the managers have a lot of analysts and 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.
We also like that BNY Mellon has invested heavily in its responsible investment capabilities. They have a dedicated Responsible Investment team, which includes Head of Sustainable Investing Andrew Parry. He joined the firm towards the end of 2019 and was previously Head of Responsible Investing at Hermes, a company well known for its work on responsible investment.
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.
This fund is available at an annual ongoing fund charge of 0.85%, making it more expensive than the BNY Mellon Real Return Fund, which has a net ongoing charge of 0.65%. 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.
The fund's done well since launch, beating both its official benchmark, LIBOR +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 done well over the past year, 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.
Within the 'return seeking core', recent performance was boosted by Taiwan-based semiconductor maker TSMC. It benefited as a high-profile competitor announced delays in the development of a new computer processor. The managers think the company is the leader in its field, and competitors are struggling to keep up with its pace of innovation.
|Annual percentage growth|
| Nov 15 -
| Nov 16 -
| Nov 17 -
| Nov 18 -
| Nov 19 -
|BNY Mellon Sustainable Real Return||N/A||N/A||N/A||10.7%||8.1%|
|BNY Mellon Real Return||3.9%||2.9%||-0.7%||11.2%||6.1%|
|IA Targeted Absolute Return||0.2%||4.3%||-2.3%||3.1%||2.6%|
Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2020.
N/A – The fund launched in April 2018 so data prior to this point is unavailable.