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. One of our preferred funds of this type 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. Among the offsetting positions are typically gold and US Treasuries, while the tactical use of ‘put options’ serve to help 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, the growing demand for healthcare and environmental change. Their analysis provides the basis for the views taken on asset classes, sector positioning, stock selection and risk.
A ‘sustainable’ alternative
Launched in 2018, BNY Mellon Sustainable Real Return is managed in the same way and has the same objectives as BNY Mellon Real Return, but it restricts investments to companies that positively manage the material impacts of their operations and products on the environment and society.
Across the entire BNY Mellon Newton range of funds, the analysis of ESG (environmental, social and governance) factors is part of the investment process but this fund makes firmer commitments to sustainability. Specifically, there is no investment in:
- Tobacco (more than 10% of revenues)
- Companies that violate UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption)
- Companies deemed incompatible with a ‘2-degree world’ – where global warming is limited to an increase of 2°C above pre-industrial levels. This is the widely accepted limitation of temperature growth to avoid significant and potentially catastrophic changes to the planet
- Companies with material ‘unresolvable’ ESG issues
In addition, the fund group’s responsible investment team engages with the companies they invest in on a range of ESG issues and report on their progress in their Responsible Investment Report. They also have the power of veto over all holdings.
Despite these additional factors, the overall anticipated difference in performance between the two funds is limited, something borne out in similarity of the portfolios. At an asset allocation level, there is a 94% commonality presently, and there is 86% commonality in terms of underlying holdings. Key differences for the Sustainable Real Return Fund are the lack of any defence or fossil fuel energy companies and the avoidance of broad index ETFs for equities or emerging market government bonds.
The fund will hold physical gold but not gold miners, which are excluded. As annual mining production is relatively insignificant (only 1.4% of above ground stock), gold itself is deemed a sustainable asset and it is at least an item that is never discarded and always recycled. There is also a special process for dealing with sovereign bonds to determine whether the issuing government meets broad ESG criteria. For instance, Brazilian government bonds are not currently considered a permitted investment, given the country’s negative trend on action related to deforestation and emissions.
BNY Mellon has invested heavily in its responsible investment capabilities over the years and the fund management team is highly experienced too. Matthew Brown and Philip Shucksmith, the fund's lead managers since launch in April 2018, have served on the Real Return team for over a decade. The annual management charge is the same for both funds, though total expenses are slightly higher for the sustainable fund owing to its smaller size. They should fall over time as assets under management increase. This hasn’t been a significant impediment to performance so far, and Sustainable Real Return has marginally outperformed its sister fund since launch and in 2020 year to date.
Both BNY Mellon Sustainable Real Return and BNY Mellon Real Return are unconstrained, flexible multi asset funds that may appeal to investors looking for modest capital growth while aiming to control volatility. They also benefit from a strong team who make full use of the wider resources across BNY Mellon. Themes, fundamentals, valuations and ESG all play a key role in the process.
BNY Mellon Sustainable Real Return goes further in terms of ‘hard lines’ in respect of sustainability factors and we welcome it to our Direct Investment Service Preferred List our curated list of investments for new investment in their respective sectors. BNY Mellon Real Return makes way for this new addition – albeit we presently hold a positive view on both funds.
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BNY Mellon Real Return and BNY Mellon Sustainable Real Return – update
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