- 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 has been added to our Wealth Shortlist of funds chosen by our analysts for their long-term potential
How it fits in a portfolio
The fund aims to dampen volatility by providing some shelter during market wobbles, while also delivering some long-term growth in a sustainable way, through investing in companies that comply with their in-house ESG criteria. This means it could be a good option 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 to returns.
Matthew Brown and Philip Shucksmith have been the fund's lead managers 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 foundation that the whole is greater than the sum of its parts. The fund's performance is down to the individual contributions of all team members. The BNY Mellon Sustainable Real Return 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 is invested in government bonds, commodities and cash, with the aim to add stability to returns. The managers can 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 to the portfolio. 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 their progress in their Responsible Investment Report (available on the BNY Mellon website).
They started 2020 with a more positive view on the economic outlook for 2020, so the 'return-seeking core' accounted for around 65% of the portfolio. But in late January, they recognised the threat posed by coronavirus and took steps to reduce risk.
The team invested in derivatives to hedge against further stock market volatility. They also reduced investments in government bonds. The proceeds were invested in gold, which often holds up well in times of uncertainty, and cash, enabling them to quickly take advantage of any attractive opportunities that arise as the pandemic situation evolves. At the peak of the stock market volatility, the 'return seeking core' had been reduced to around 45% of the fund.
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 and recently recruited Andrew Parry as Head of Sustainable Investing. Parry 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 Real Return team have an excellent long-term track record. Our analysis of their performance since the team's inception in 2004 suggests they've beaten both their official benchmark, LIBOR +4% and their peers in the IA Targeted Absolute Return Sector. This fund will behave differently than previous ventures though.
The BNY Mellon Sustainable Real Return Fund launched in April 2018. It's performed much better than its peers in the IA Targeted Absolute Return sector over that time, and also beaten the LIBOR + 4% benchmark. We think this is impressive given how volatile the stock market's been in recent months. It's 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’d expect the managers to perform relatively well if markets go through prolonged tumbles but lag rising markets. Although there are no guarantees and like all funds, it can fall in value as well as rise so investors could make a loss.
*Source: Lipper IM 31/05/2015 – 31/05/2020
|Annual percentage growth|
| May 15 -
| May 16 -
| May 17 -
| May 18 -
| May 19 -
|BNY Mellon Sustainable Real Return||N/A||N/A||N/A||7.9%||2.2%|
|BNY Mellon Real Return||0.6%||4.8%||-2.3%||6.8%||1.7%|
|IA Targeted Absolute Return||-0.8%||4.3%||0.4%||-0.2%||-1.1%|
|LIBOR GBP 1 Month + 4%||4.5%||4.3%||4.4%||4.7%||4.6%|
Past performance is not a guide to the future. Source: Lipper IM to 31/05/2020. *The fund launched in April 2018 so data prior to this point is unavailable.