Targeted absolute return funds aim to be the ‘plodders’ rather than the ‘leapers’ of the fund world. This objective resonates with more cautious investors or those wishing to diversify a portfolio in order to balance more risky areas such as shares. However, delivering modest returns while minimising short term ups and downs has been challenging in the recent market environment. In share markets, performance has been dominated by a fairly narrow range of US technology and global companies offering stable growth. Meanwhile, bonds have seen some quite large swings based on the expectations of interest rates.
One of our preferred targeted absolute return funds, and part of our Direct Investment Service Preferred List, is BNY Mellon Real Return. It invests in a diverse portfolio of assets, aiming to beat the return on cash by 4% a year (before charges) while limiting the scope for losses. However, prioritising capital preservation is an aspiration rather than a promise, and the fund can fall as well as rise in value.
The fund comprises a ‘core’ of assets chosen to generate attractive long-term returns, which are offset by stabilising, lower-risk assets and hedging positions to dampen volatility and to provide downside protection. The core is currently invested in shares of high-quality companies with predictable and stable cash flows, alongside bonds which the managers believe offer value. At present this includes some emerging market debt. Among the offsetting positions are typically gold and US Treasuries, while the tactical use of ‘put options’ serve to protect the portfolio against a significant fall in the market.
The managers use a thematic approach to investment decision making, which focuses on identifying long-term structural changes impacting the global economy. This includes demographic shifts, growing demand for healthcare and environmental change. This analysis provides the basis for the views taken on asset classes, sector positioning, stock selection and risk.
Performance over the past year has been strong, driven primarily by the component of the fund invested in shares, though there were smaller contributions from corporate bonds, emerging market debt and alternative areas such as infrastructure funds. Stock selection was also strong this year, with exposure to some technology holdings such as Microsoft particularly helpful.
The portfolio has been more tilted towards these ‘return-seeking’ assets than previous years with a roughly 60/40 split between these and the stabilising lower risk and offsetting areas. That’s because the managers have gradually become more positive on the global economic environment. As such gold has been reduced from 12% to 6% and there have been some additions to more economically sensitive areas such as financials and to housebuilders both in the US and in the UK.
Overall, the assets designed to stabilise the fund were broadly flat over the past year, with a strong showing from government bonds and precious metals offset by the negative effect of equity market hedging (protecting the portfolio from falls in share prices).
This unconstrained multi asset fund may appeal to investors looking for capital growth while aiming to control volatility. The fund benefits from a strong team who make full use of the wider resources across BNY Mellon. While there have been recent changes, as strategist Iain Stewart retired in December 2019, we believe the team are experienced and capable. We are conscious that the team are now running £13bn across their range of funds and accounts, which we consider a substantial quantity of assets and something to keep an eye on. It remains part of our Direct Investment Service Preferred List our curated list of investments for new investment in their respective sectors.
Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.