Cost and performance issues top concern in seven BNY Mellon amber-rated funds

James Baxter-Derrington
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Cost and performance issues top concern in seven BNY Mellon amber-rated funds

BNY Mellon Investment Management has marked seven of its funds for ongoing reviews into performance and fees, with the amber-rated funds given until February 2021 to shape up.

Of the 40 funds in the BNY Mellon Investment Funds range, seven received an amber rating, while another seven were excluded from being rated due to insufficient track record, leaving the remaining 26 funds rated green, offering "value for money" by its Assessment of Value (AoV) report.

The BNY Mellon Corporate Bond fund was spared a red rating because "remedial action has already been taken with positive results for investors", including a manager change in October 2019 following a period of not achieving its investment objective of outperforming its benchmark by 1.5%.

The board said that while the fund had shifted 292 holdings from legacy to B shares, the costs on the shares is still "high relative to similar funds."

Since this action has been taken, the fund has met its performance objectives, but it still received an amber warning as the turnaround has been over a very short timeframe, along with its costs being declared "expensive" in the AoV report.

As with all of the funds receiving an amber rating, the BNY Mellon Corporate Bond fund has been given until February 2021 to finish its review and take relevant action.

BNY Mellon Emerging Income fund was singled out for its "long standing underperformance" along with high fees due to its small size, with just £76.2m assets under management.

In June this year, a proposed merger with the BNY Mellon Asian Income fund, which would have helped to reduce costs, was rejected by shareholders, leaving the board examining "potential alternatives" to better support investors.

Only partially meeting its objectives, BNY Mellon Equity Income may see its objective altered to reflect the manager's preference for income over capital.

The board felt the fund suffered from a "persistence of underperformance on a total return basis" but noted that the income target exceeded many of its peer group.

The BNY Mellon Global Absolute Return fund was given its amber rating for both poor performance and unsatisfactory costs, although the board acknowledged the fund had transferred 210 retail holdings in the legacy retail share classes to the lower-cost retail B share classes.

While the fund "generally achieves a return above cash on a rolling one-year basis", it fails to meet its cash plus 4% rolling, annualised five-year target, which combined with "higher than average costs", partly due to its investments in exchange traded funds, has affected its long-term performance.

Although the fund suffered half the average market losses in March, it still witnessed a double-digit fall, which the board considers "significant for an absolute return fund", and added that Spring's volatility was not the only reason the fund missed its five-year target, also citing its 2018 negative return.

Both the BNY Mellon Global Multi-Strategy and Inflation-Linked Corporate Bond funds missed out on a green rating due to "disproportionately high" costs for retail investors, which was attributed both to the instruments the funds are invested in, including derivatives and ETFs, and the relatively small fund sizes - £86.6m and £64.5m respectively.

The largest fund to be sanctioned as part of the firm's AoV is the £5.5bn BNY Mellon Real Return fund, which failed to deliver good value in both performance and cost.

In regards to the former, while the fund achieved positive returns over a rolling three-year basis, it failed to meet its rolling five year cash +4% target.

Turning to costs, the board said that while the fund had shifted 292 holdings from legacy to B shares, the costs on the shares is still "high relative to similar funds."

Although it achieved a green rating overall, the BNY Mellon Global Dynamic Bond fund scored below "good value" in both its performance and cost criteria, but the report explained the amber scores were merited according to quantitative criteria, but qualitative analysis led the board to believe the fund still offered value overall.

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