BNY Mellon US Equity Income – September 2023 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

• John Bailer has managed US Equity income funds since 2005 and has an established, clear and effective investment process
• The fund has typically performed strongly when its value-style of investing has been in favour
• The fund could add US exposure to a global portfolio or work well alongside other more growth focussed US funds
• This fund was recently added to our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The BNY Mellon US Equity Income fund aims to maximise total returns by growing both the income it pays to investors and the capital value. The fund can invest across the US market, but it tends to be invested in large companies that trade at attractive valuations that provide a balance of income today and dividend growth potential for the future. We think the fund could be a good way to add US exposure to a global portfolio or could sit alongside other US funds focused on more growth-style companies.

Manager

The fund is managed by John Bailer, a seasoned investor with over 20 years of experience under his belt. He entered the industry in 1992 and has managed US income strategies since 2005. Bailer has been manager of the BNY Mellon US Equity Income Fund since launch in 2017. He also runs the income sleeve for the BNY Mellon VIF Growth and Income fund and is back-up manager on the BNY Mellon US Dynamic fund. Given the commonality of approach, we’re comfortable that this is a manageable load.

Bailer is supported by back-up managers Brian Ferguson and Keith Howell in managing this fund. Ferguson has over 20 years of portfolio management experience and is a senior portfolio manager and research analyst at Mellon Investment. He’s managed the BNY Mellon Dynamic Value fund since 2003, a fund where Bailer is the back-up manager. Keith Howell joined BNY Mellon in 2006 as an analyst covering various sectors including financials, technology, and industrials. Howell became back up manager in 2021 after 15 years as an analyst.

We think Bailer is well resourced to focus on the job in hand. Along with his back-up managers, he and the team are supported by around 20 analysts.

Process

Bailer aims to invest in companies that he believes can deliver a balance of a good income today, and dividend growth in the future. The process starts with a broad screen of the Russell 1000 as a good representation of the large-cap US market. Bailer uses this to identify businesses with high quality characteristics. These businesses will typically have strong balance sheets and free cash flows, sustainable and well covered dividends and attractive revenue and earnings growth rates.

Bailer spends a lot of his time working with the wider analyst team at BNY Mellon as part of the idea generation process. This includes detailed analysis of companies to determine how much he believes the company’s shares are actually worth, and spotting those that he believes are undervalued. Bailer wants to invest in companies that are trading at share prices lower than he feels they are worth in the long term, possibly reflecting some short-term headwinds. The manager works with analysts to consider what the upside and downside potential from here is.

Bailer will also look at the whether the company pays a dividend to its investors and whether he believes the dividend will grow over time. Every company the fund invests in must pay a dividend at the time of purchase. Bailer believes if a company is paying a dividend, then this is a good indication that management are allocating capital appropriately.

This process leads to a portfolio of 30-60 companies. The fund can be quite concentrated, so each investment can have a big impact on performance, increasing risk. There is also the flexibility to use derivatives which increases risk.

Over the last 12 months, Bailer has marginally decreased the fund’s weighting in its largest sector exposure, financials, as well as decreasing exposure to industrials and utilities. This has funded increases to investments in the healthcare, energy, and consumer discretionary sectors.

In recent months, Bailer has added to his position in International Game Technology within the consumer discretionary sector as well as initiating a position in high-end hotel operator Wynn Resorts. Bailer has also added to energy companies EQT, ConocoPhillips and Hess. Some names did exit the fund, reflecting Bailer’s views of better relative valuations elsewhere in the market. Utilities company PPL was sold and exposure to utility company Exelon reduced.

Culture

BNY Mellon is a large, US-based firm so the managers have a lot of resources at their disposal. In September 2021, Mellon Investments merged its equity and multi-asset teams into Newton. While this has not impacted the way Bailer invests for this fund, it has given him access to a larger pool of research analysts that help with idea generation.

The managers are incentivised in a way that aligns their interests with those of long-term investors, which we like. However there have been some significant fund manager departures from the wider Newton and BNY business in recent years and we continue to monitor this situation closely.

ESG integration

The team at BNY Mellon (formerly Newton) believes responsibly managed companies are better placed to achieve sustainable competitive advantage and provide strong long-term growth. They’ve invested a significant amount of time and resource into their Responsible Investment proposition in recent years, including the hire of Therese Niklasson, the firm’s Global Head of Sustainable Investment, who we have long held in high regard.

A dedicated Responsible Investment team exercises the firm’s voting rights, coordinates engagement with investee companies and contributes to public debate on Environmental, Social and Governance (ESG) matters. The team reports on their engagement progress in their annual Responsible Investment and Stewardship report, and their quarterly ‘ESG meeting activity’ report (both available on the Newton website). They also provide a voting report, which provides detailed rationales for votes against management and abstentions.

All fund managers have access to a Responsible Investment app which centralises a variety of research providers’ data, as well as their own, to help identify material ESG and sustainability issues for a single company. It also includes a quantitative net-zero assessment tool to support their analysis of each company’s net zero transition plans.

In recent years, the firm has launched a sustainable range of funds which take ESG analysis further. They utilise the firm’s thematic research framework to identify and exploit sustainable investment themes. Within the Sustainable range, the Responsible Investment team has power of veto over companies held in the portfolios. This means the final decision is separated from the managers and provides an additional layer of challenge.

Cost

The fund has an ongoing annual charge of 0.82%. The HL platform fee of up to 0.45% per year also applies.

Performance

Over Bailer’s career managing US equity funds stretching back to 2005, he’s delivered long term outperformance of the IA North America peer group average.

The fund has performed well over the last five years but has marginally underperformed its peer group. Its returned 55.16% versus 56.90%* for the IA North America sector average. For a lot of this period the manager’s value-style of investing has been out of favour, posing a headwind to performance. However, our analysis suggests that Bailer has consistently demonstrated an ability to add value through stock selection. Our analysis also suggests that during periods where value has been in favour with investors, the fund has typically performed well. As always, past performance is not a guide to future returns.

Over the last 12 months the fund has risen by 2.58%, compared with a return of 4.16% for the IA North America sector average. Many investors believe that inflation has now peaked and that we are close to the end of the interest rate rising cycle. As a result, the fund’s value-style of investing has been a headwind since the start of 2023, and so for most of this 12 month period, as investors have moved back towards favouring growth companies.

Our analysis suggests that Bailer’s stock selection has contributed positively to performance over this period. The fund’s investment in utility company Constellation Energy Corporation was the biggest contributor to returns, followed by International Game Technology and healthcare company Sanofi. On the other hand, investments in financial services companies US Bancorp and Comerica Incorporated have been among the larger detractors from performance.

We think Bailer has built a strong track record in US income investing and has done a good job over the long term for patient investors. The fund offers something quite different to some of its peers in the IA North America sector and Bailer is well supported and resourced for the task at hand. This gives us confidence in the fund’s long-term prospects.

The fund currently yields 2.46%. Although income is not guaranteed, and yields aren’t a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2023.

FIND OUT MORE ABOUT BNY MELLON US EQUITY INCOME INCLUDING CHARGES

VIEW BNY MELLON US EQUITY INCOME KEY INFORMATION DOCUMENT

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. No news or research item is a personal recommendation to deal.

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