BNY Mellon Real Return: April 2020 fund update

Jonathon Curtis | Thu 30 April 2020

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• The managers have done a good job over the long-run sheltering investors from short-term volatility
• The team is one of the best-resourced in the sector
• We think Andy Warwick joining the team has been a positive for the fund

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. 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 to returns.

Manager

This fund is run using a team-based approach. The three lead managers, Suzanne Hutchins, Aron Pataki and Andy Warwick, pull together their collective skills and expertise. They then have the support of the wider, well-resourced BNY Mellon team to draw on lots of different ideas.

Veteran investor Iain Stewart, who was previously the fund’s long-serving manager, retired in December 2019. He’d been reducing his involvement with the fund for some time though. While the departure of his decades of experience is undoubtedly a loss, the remaining managers bring plenty of their own. Hutchins and Pataki have both been involved with the fund since 2010. Warwick is the newest member of the team, having joined mid-2018, but has been managing other multi-asset funds for over a decade.

We think the team is sensible, very well supported and has fulfilled the fund’s long-term aim of keeping volatility low. We think Andy Warwick brings a different perspective to the team and we view him as a positive addition. We expect the managers to keep delivering on what they set out to do, although there are no guarantees.

Process

The managers aim to deliver 4% more than LIBOR (the interest rate at which major banks lend to each other) over five years. They do this using a mix of assets that broadly fall into two camps. One contains those they think will provide long-term growth, such as shares and corporate and emerging market bonds. The other comprises those that aim to add stability to returns, such as gold, government bonds and cash. They have the flexibility to invest in different amounts of each, or even none at all at times, depending in their view of the world.

The team seeks to dampen volatility and places more emphasis on not losing money than making it. They believe that’s the best way to deliver sustainable long-term returns. 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 portfolio is currently made up of around 30% in shares and a little over 20% in bonds. Since the end of February the managers have nearly halved the bond exposure and have bolstered their investments in gold, as they currently prefer gold over bonds as a hedge against stock market volatility. They’ve also increased their cash position more than threefold to around a quarter of the portfolio. This is so they can quickly take advantage of any attractive opportunities that arise as the pandemic situation evolves. In keeping with the managers’ low volatility approach, 90% of the currency exposure is to sterling, to minimise the impact of currency swings.

Culture

BNY Mellon is 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 very much the same.

Hutchins, Pataki and Warwick all manage one other fund, which they manage in a similar fashion to this one. That means they’re all focused on investing in the same way, with little else to distract or overburden them.

The wider group that the team is part of emphasises investment themes across its range of funds. It does this to help them focus on global trends they believe will have a big global impact in the future, such as interconnectivity, sustainability and security.

Responsible investment is also an important part of the wider group’s research process. Each company’s environmental, social and governance issues (ESG) are considered, as they believe this has a big influence on future returns.

Cost

This fund has an ongoing annual charge of 0.85%, but we've secured HL clients an ongoing saving of 0.20%. This means you pay a net ongoing charge of 0.65%. This is one of the lowest fund charges within the IA Targeted Absolute Return sector. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. Our platform charge of up to 0.45% p.a. also applies.

Performance

For most of the time since Hutchins’ and Pataki’s involvement began in 2010, the fund has performed broadly in-line with its LIBOR +4% benchmark. It tailed off mid-way through 2017 as the managers admit they were too cautious. Returns improved from the end of 2018, when the trio officially became co-managers, having added more equities, and higher-risk high-yield bonds and emerging market bonds to the portfolio. Since the market volatility began at the end of February, however, performance has again fallen behind the LIBOR +4% 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’d expect the managers to perform relatively well if markets go through prolonged tumbles but lag rising markets, although there are no guarantees. This is a conservative fund designed to temper volatility, so we think it’s a good option for preserving capital over the long-run or for smoothing portfolio returns.

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2020.

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