For many investors, not losing money is just as important as making more. The
BNY Mellon Global Real Return
fund excels at both.
The fund (ticker: DRRIX), managed by London-based Suzanne Hutchins, 53, aims to generate positive long-term, or “absolute,” returns, regardless of how the market has performed. “The objective…is to generate an absolute return of Libor or cash plus 4% over the longer term, and to help preserve capital on the downside,” she explains.
Libor, the London interbank offered rate, has been near zero since the 2008 crash, except for a small spike in 2018 and 2019—which means the $3 billion fund’s 4.2% annualized return in the past decade is close to its goal. It also beats 94% of its peers, many of which also seek absolute returns, in
Multialternative fund category. Throw in a 0.91% expense ratio—low for its hedge-fund-like category—and its appeal is apparent.
The U.S. version of the fund launched in 2010 after the 2008-09 bear market ended, though the British version of the strategy—largely identical except for its U.K. currency exposure—dates back to 2004. That strategy produced an impressive 4.8% return in 2008 when the MSCI All Country World Index of stocks fell 42% and the
index dived 37%. The U.S. fund has only had one down calendar year, a minuscule 0.01% decline in 2011.
One advantage of Hutchins’ strategy is its flexibility. The fund can invest worldwide in stocks, bonds, commodities, and precious metals without weighting constraints. It can also hedge, typically buying put options—financial contracts that give holders the right to sell securities at a predetermined price—in indexes such as the S&P 500 or the Euro Stoxx 50 to limit the downside. “We live in an ever-evolving investment environment, and you need to be dynamic and flexible” to produce absolute returns, she says. “You don’t want to be constrained by being all equities. An all-equities strategy brings about a lot of volatility.”
While a flexible allocation strategy is good in theory, it is challenging to execute in practice, as it requires a deep knowledge base in every asset class. The fund has that. Hutchins heads a team of eight portfolio managers, each with a different expertise—from derivatives and hedging maven Aron Pataki and corporate-debt specialist Philip Shucksmith to global-equities expert Matthew Brown. The team can access any of advisor Newton Investment Management’s 70-plus investment staff.
Hutchins employs both a top-down macro approach to asset classes, as well as a bottom-up one to find the best individual securities in those classes. Most funds lean either one way or the other, and managers of allocation funds tend to emphasize macro analysis of investment categories and will often use index funds or futures to access them.
Note: Holdings as of Sept. 30; Returns through Oct. 12; all returns are annualized.
Sources: BNY Mellon; Morningstar
The fund’s top stock position is
(LIN), a U.K.-based supplier of industrial gases such as nitrogen, argon, helium, and acetylene. “It’s the largest company in the global industrial gas space, and it’s in a very consolidated market,” Hutchins says. Linde’s industry dominance gives it pricing power, giving it “real competitive advantages,” she adds, even though it is economically sensitive.
Hutchins sees Linde’s cyclicality as a strength. “We’ve seen the Covid winners being a lot of the technology companies, and what we’ve been wanting to do, over the course of this year, is balance out the portfolio between cyclicals and structural growth [companies],” she says. “Our view is that the economy will come out of the recession that we’re in.” The fund also holds tech stalwarts like
Overall, Hutchins is “constructive” in her economic outlook for 2021. “The amount of [central bank] quantitative easing and monetary response [to the coronavirus crisis] dwarfs that of 2008 by about five- or six-fold,” she says. “It’s humongous, and it’s on a global scale. And that money has got to go somewhere.”
But she warns that uncertainty about elections and the pandemic could spike volatility in the short term, so she has hedged a portion of the fund’s exposure with index put options. At the start of 2020, the fund had 30% in individual stocks, with 26% net equity exposure after adjusting for hedges. At the end of August, it had 44% in stocks, with 38% hedge-adjusted. The fund’s cash position has dropped from 27% at 2020’s start to under 6% as of Aug. 31, as it went on a stock buying spree during the March crash.
Another defensive investment is gold, which makes up about 15% of the portfolio, compared with just 6% at the start of the year. “Historically, in the first four years of the strategy, we didn’t own any gold whatsoever,” Hutchins says. She began incorporating gold into the fund’s toolbox after the 2008-09 financial crisis. Gold normally competes with the U.S. dollar as a store of value globally, but when rates are zero and central banks are printing money—as they are now—the dollar begins to lose value against an alternative currency like gold.
All of Hutchins’ maneuvers have enabled the fund to hit its return target in this most volatile year—it is up 5.8% in 2020, and 8.1% in the past 12 months. The fund’s volatility is much lower than that of the S&P 500, and more comparable with high-quality bond funds. Such “investment grade” bonds typically yield less than 2% right now and will suffer if interest rates rise again, as bond prices and rates move inversely. In such an environment, the Global Real Return fund looks especially good.
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