BNY Mellon Real Return: November 2024 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 potential balance.

Manager

This fund is managed using a team-based approach. The two lead managers, Aron Pataki and Andy Warwick, pool together their collective skills and expertise.

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 in mid-2018, but he built up significant experience managing multi-asset funds prior to joining the firm.

Pataki and Warwick are supported by a wider team of seven investment professionals with a range of roles from portfolio managers, analysts and strategists. Each team member has differing responsibilities and areas of specialism and there is a big emphasis on collaboration between them.

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, cash and derivatives with the aim of adding stability to returns. The managers alter the amount invested in each section of the fund depending on their view of the world.

The managers use of derivatives, high yield bonds and assets from emerging markets all increase 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.

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 shorter time periods.

The split of investments in the fund between the return seeking core and the stabilising layer is roughly the same at the end of October 2024 as it was at the end of September 2023. It had 67.1% invested in the return seeking core at the end of October and 32.9% in the stabilising layer.

Within the return seeking core, the managers have increased investments in shares from 36.8% at the end of September 2023 to 46.2% at the end of October 2024. They have reduced investments in corporate bonds, alternatives and emerging market debt within this part of the fund too.

Within the stabilising layer the team have increased the amount invested in government bonds and have reduced the amount in cash.

Overall the team have been active in altering their investments within the fund, which is fairly typical for the managers, particularly during volatile markets.

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.

A dedicated Responsible Investment team exercises the firm’s voting rights, coordinates engagement with investee companies and contributes to public debate on ESG matters. The team reports on their engagement progress in their annual Sustainability and Stewardship report, and their quarterly ‘ESG meeting activity’ report (both available on the Newton website). They also offer a voting dashboard, which provides fund-by-fund search functionality and detailed rationales for votes against management and abstentions.

All fund managers have access to a variety of tools, including a “Responsible Investment reviews” app which centralises a variety of research providers’ data, as well as their own, to help identify material ESG and sustainability issues for a single company, and a ‘net zero assessment’ tool assesses credibility of each company’s net zero transition plan. The firm has also launched a Stewardship app, a database which allows the team to better track progress on their engagement objectives, as well as outcomes from their engagement and voting activities.

In recent years, the firm has launched a sustainable range of funds which take ESG analysis further. They utilise the firm’s thematic research framework to identify and exploit sustainable investment themes. Within the Sustainable range, the Responsible Investment team has power of veto over companies held in the portfolios. This means the final decision is separated from the managers and provides an additional layer of challenge.

Overall we think ESG risks are considered in a meaningful way by the investment team for this fund. However this fund is not part of their Sustainable range.

Cost

This fund has an ongoing annual charge of 0.82%, but HL clients benefit from an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.62%. 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, except in the HL Junior ISA, where no platform fee 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 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 Warwick officially became a co-manager, the fund has returned 26.84% compared to its benchmark return of 40.10%, with the IA Targeted Absolute Return sector average return being 21.68%. Remember though that past performance is not a guide to future returns.

SONIA + 4% per year can be a high bar for a fund that places most emphasis on not losing money during market wobbles. SONIA moves in line with interest rate changes, so when rates are higher as we’ve seen in recent years, the fund’s performance hurdle is also higher. This makes it more challenging for funds that tend to be defensively positioned.

That said, this is what we would expect and, while the fund has underperformed its benchmark, it’s performed better than peers. And importantly, the fund has achieved its returns with much lower volatility than shares, providing important diversification and some shelter to investment portfolios during market shocks such as covid in 2020.

Overall, we expect this fund won’t lose as much as stock markets during market shocks and over the long-term will generate positive returns with less ups and downs than shares. Over the past 12 months, the fund has outperformed both its benchmark and peers. The biggest contribution to performance has been the investments in shares. The managers increased their investments in shares towards the end of 2023, which worked well for them as stock markets have performed relatively well over the last 12 months. The team have been active in changing the amount invested in stock markets, including reducing the amount invested in them again during the summer of 2024. Overall, this has worked well over the 12 months.

It wasn’t just shares that added value though, investments in bonds, cash and gold all added positively to performance over the year.

In terms of negatives, some of the derivatives the team use to provide protection in the event of a large market sell off provided a negative return. Currency exposure also hurt performance .

At the end of October 2024, the fund had an historic yield of 2.68%. Yields are not an indication of future income and are not guaranteed.