BNY Mellon Global Income: May 2021 fund update

Henry Ince | Fri 14 May 2021

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  • Ilga Haubelt and her team hunt around the globe for the best income opportunities
  • Deep individual company analysis is coupled with thematic and ESG research
  • The fund's long-term performance has been good but it's struggled over the past year
  • The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The BNY Mellon Global Income fund aims to grow income and capital over the longer term by investing in companies from around the world. The team look to identify the driving forces behind future growth opportunities such as digitalisation and then invest in companies they believe can benefit from these dynamics. Typically, they invest more in 'value' stocks which means it could work well alongside 'growth' orientated funds and provide global diversification to an income-focused portfolio.

Manager

Ilga Haubelt is co-manager of the fund and has been Head of Equity Income since March 2020 having joined the firm a year earlier. Haubelt entered the industry in 2005 and previously worked at German asset manager Deka Investment where she was Head of Global Equities and managed income focused funds. She also has experience in US equities and real estate.

Jon Bell works alongside Haubelt as co-manager. He joined Newton in 1995 after graduating from Cambridge University and has spent much of his time investing in global and multi-asset portfolios. Bell's time is divided between portfolio management and keeping investors updated on the fund's activities.

Robert Hay and Paul Flood are the fund's remaining co-managers, both of whom joined on Newton's graduate scheme and have worked alongside Bell for over 15 years. Hay focuses entirely on this fund, whilst Flood is also responsible for managing other multi-asset funds.

This is a team-based approach with all four members having equal decision-making power. Given the resources available, we think the managers dedicate a sufficient amount of their time to this fund. They also benefit from the support of a large pool of analysts.

Process

The managers believe that the best way to achieve long-term growth is through the compounding (reinvesting) of dividends over time. To harness this philosophy, they have a strict buy and sell discipline to ensure that the companies they own compound at a higher rate than the market. For a stock to be considered for the portfolio it needs to yield at least 25% more than their benchmark – the FTSE World. In contrast, should the stock's yield fall below the benchmark it must be sold.

Investing in companies with unsustainable yields can be detrimental to long-term returns and is a risk they actively manage. Their bottom-up approach helps them to avoid these by investing in 'quality' companies which have a dominant market position, sensible balance sheet and can easily generate cash. Understanding how companies will benefit or struggle to adapt to an ever-evolving society is another key aspect of their process. The managers will also assess if these businesses are supported by thematic tailwinds like consumer power and state intervention. They model a wide range of possible scenarios and try to invest where they believe there is attractive potential returns on offer which outweigh the risks.

The companies the managers invest in are broadly split into four buckets of 'controversy'.

'Troubled Compounding Machines' form the foundation of the portfolio with just under 40% of the fund invested here. It consist of companies operating in industries that others can't easily enter due to legal, geographical or cost barriers for example. Whilst these may be good businesses with growth opportunities ahead of them, they are hampered by short-term obstacles which the managers are prepared to look past.

'Ex-growth Cash Generators' is another bucket of the portfolio and features companies whose best days of growth might be behind them but they are underrated by the market, even though they can still efficiently generate returns. The third bucket focuses on 'Capital Intensity' and is home to service sector businesses such as banks and insurance firms. Last but not least is 'Profitability Transformation'. These tend to be cyclical companies, whose profits are tied to the fate of the wider economy such as property builder Taylor Wimpey and luxury fashion company, Tapestry.

This whittles a universe of around 2,600 companies down to a concentrated portfolio of between 40-70 names. Currently they own just under 50 which means each holding can have a significant impact on performance, which adds risk. Developed markets are a key focus with around 40% of the fund invested across North America and Europe. They also invest in higher-risk emerging markets but exposure here is mainly through the revenues of countries listed elsewhere. The fund has not had any exposure to higher-risk smaller companies in recent years, but does have the flexibility to invest in them which, if used, would add risk.

The Covid-19 pandemic has been tough, particularly for those investing for income. Given these unusual conditions, last May the managers decided to temporarily override their strict sell discipline. This meant they weren't forced to sell what they believe to be quality, income generating companies that were forced to cut their dividends. This temporary 'Covid' basket has so far only been home to two companies, publishing company Informa and Richemont, owner of luxury brands such as Montblanc and Cartier.

Over the past year the team has invested in attractive businesses at depressed share prices. One example is analytics company, RELX which offered an enticing entry point after its share price fell. Home Depot was also purchased. The managers believe it offers good cyclical opportunities and should benefit from strong thematic tailwinds. Other new purchases include semiconductor producer Texas Instruments and automotive parts manufacturer Continental.

They have also sold several companies. Harley-Davidson, the motorcycle manufacturer, saw its yield fall below the market's but was not placed in the 'Covid' basket due to concerns surrounding thematic headwinds. Other holdings were also sold due to valuation concerns such as biotech firm Gilead Sciences and consumer goods company, Orkla. Investors should be aware that charges are taken from capital, which can increase the yield but reduces the potential for capital growth. The manager also has the flexibility to use derivatives which, if used, increases risk.

Culture

Newton Investment Management are responsible for this fund, and operate under the umbrella of BNY Mellon. Equity income investing is an important part of Newton's business and its experienced team comprises of eight portfolio managers, four of whom have solely managed this fund since June 2020.

BNY Mellon is a large, US-based firm so the managers have a lot of analysts and resources at their disposal. Until mid-2019 the fund operated under the Newton banner but following a re-brand the fund has since changed to that of the parent company.

We like that the fund managers are incentivised in a way that aligns their interests with those of long-term investors. That said, there have been some significant fund manager departures in recent years, and we hope the current team will provide some stability for investors.

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.

Cost

The fund is normally available for an annual ongoing charge of 0.81%. We negotiated a 0.24% saving though, so it's available on the HL platform for 0.57%. 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 fee of up to 0.45% per year also applies

Performance

The fund has performed well since launch and grown 70.4*% vs 66.9% for the IA Global Equity Income sector average over the past five years. But while the process has largely remained the same, much of this performance is attributed to the fund's previous managers.

During the past 12 months the fund has returned 18.1% vs 26% for the sector average. It's important to remember the current management team took over in June 2020 which is only a short time period to assess their performance. Investments in semiconductor company Qualcomm and Indian IT consultant Infosys have been some of the best performing holdings during this period. Other notable performers include Samsung Electronics and Tapestry. Remember past performance isn't a guide to future returns.

Since the managers' arrival, investing for dividends has been difficult. When they took over there were 45 companies in the portfolio, 11 of which either cut, postponed or suspended their dividends. The consumer discretionary sector was hit particularly hard with holdings such as clothing company H&M and beauty brand Coty feeling the pressure. During 2020 income for the portfolio was down around 10%, holding up better than the market's decline of just over 15%.

The fund yields 2.59%, which is higher than the FTSE World Index of 1.79% as at 31 March 2021. Remember yields are variable and are not a reliable indicator of future income.

Annual percentage growth
Apr 16 -
Apr 17
Apr 17 -
Apr 18
Apr 18 -
Apr 19
Apr 19 -
Apr 20
Apr 20 -
Apr 21
BNY Mellon Global Income 24.8% 2.7% 15.9% -2.8% 18.1%
IA Global Equity Income 24.5% 4.3% 7.9% -5.5% 26.0%

Past performance is not a guide to the future. Total returns with income reinvested. Source: *Lipper IM to 30/04/2021.

Find out more about BNY Global Mellon, including charges

BNY Global Mellon Key investor information

Important information

Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice.

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