2016 Awards Winners - Best Global Equity Fund - BNY Mellon Global Opportunities Fund – USD B

Key Stats
Inception Date: 7 December, 2001
Morningstar Rating (as of 2016-02-29):
Total Net Assets (Mil, as of 2016-02-29): 120.56 USD
Manager: Robert Hay
Manager Start Date: 20 March, 2009

M: Morningstar  R: Robert Hay, fund manager of BNY Mellon Global Opportunities Fund

M: Could you highlight any major changes you made to the portfolio over the course of 2015? Were there any particular holding(s) that drove the fund’s performance for the year?

R: We removed holdings in companies that may be excessively challenged by a more difficult economic and financial backdrop, and are not valued accordingly as well as some holdings in companies that have been on the right side of the expansion in valuation in recent times and the increasing dispersion of returns within equity markets. We benefitted from actively managing the size of our holdings, to reflect significant changes in valuation, reducing some holdings that had performed well and increasing others that had suffered setbacks.

We also purchased holdings in businesses that have fallen out of favour with short term investors, for reasons that we believed would prove temporary. We continued to seek holdings that can offer a degree of underlying stability, where the valuation is not excessive – such stocks enjoyed a steady re-rating during the course of 2015 as the market increasingly worried about the risks to global growth.

2015 was a year that featured a large degree of dispersion in the returns produced by the various industry sectors of the world equity market. On the whole the fund was positioned on the right side of this dispersion (limited exposure to energy, mining, and financials, and significant exposure to consumer sectors, information technology, and health care). The sector allocation effect contributed approximately 3.5% to relative performance.

On top of this, stock selection added considerably more to relative performance. A number of these contributions came from companies that have successfully grown at rates substantially above GDP for many years (Equifax, Alphabet (formerly Google) and Accenture). Some contributions came from businesses featuring the kind of stable demand profile that seemed to be favoured by investors during this more volatile year (Japan Tobacco, RELX (formerly Reed Elsevier), Kraft Heinz). The Fund also benefitted from several holdings in companies that had previously been out of favour with investors, but announced news or results that encouraged investors to reassess their opinion of the company and of what constitutes an appropriate valuation (SAP, TripAdvisor, Mattel).

M: What is your outlook for 2016 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

R: Over the seven years since the global financial crisis, central bankers have demonstrated an extraordinary willingness to act to prevent markets adjusting to reflect the reality of a slower growth, low-return world. We have talked a lot over the years about how a sustained and asymmetric programme of targeting financial assets with cheap money distorts the financial system, but it bears repeating as we believe it is likely to be the key issue affecting investors’ wealth in the coming years.

Our belief is that in the determined (and probably misguided) inflating and backstopping of financial assets, policy has created a very dangerous confluence: not only has demand been brought forward from the future to the present, but returns have also been similarly shifted to the present. Yet risk appears to investors to have been moved from the present to the future.

The degree of indebtedness across the various regions of the world, and across the household, corporate and government sectors, is a major headwind to the economic and financial outlook, and is a source of fragility. Valuations are broadly high by historic standards, particularly in the context of elevated corporate profit margins in some major world economies, encouraged by very loose monetary policy. In a broad environment of weak growth, there are nonetheless advantaged companies that can grow by taking revenue share from other businesses or industries. In aggregate our portfolio companies trade on an above average free cash flow yield, generate above average returns on invested capital and carry a well below average level of debt.

M:  Can you comment on the macro risks facing the global economy, including the US rate hikes, weaknesses in commodity prices and the significant headwinds facing the emerging world? How do these risks affect your investment decisions?

R: There are concerns about the outlook for the global economy, not least the prospects for the Chinese economy, and the disinflationary impetus in consumer and producer prices. The impetus is exemplified by oil’s fall below $30 a barrel amid concerns about a global supply glut; and, in the US, wholesale prices were recently reported to have fallen for the 14th straight month.

We believe share-price volatility is likely to have been exacerbated by challenging liquidity conditions. While the recent US interest-rate rise may have been motivated by apparent improvement in the economic outlook, we firmly believe that some significant structural challenges - including ageing populations, growing debt, disinflationary pressures from technology and a move towards protectionism – remain in place. We maintain that attempts to control economic variables such as interest rates, inflation and employment are actively stimulating over-capacity and increasing fragility in economies and financial markets. We believe, in short, that the future environment will be one of greater volatility and lower returns, increasing the need to be highly selective in stock picking.

In this volatile environment, we believe that an unrelenting focus on companies with solid and repeatable cash flows, sensible capital allocation and robust balance sheets remains an attractive way to generate stable returns. We also believe that the ability to remain patient, and not to be fully invested, is in our view desirable as we expect to see more attractive valuation opportunities emerge in the future. Ultimately, we believe the process we have in place has the ability to generate a wide variety of good ideas and that when market volatility does present itself, it can be a good opportunity to buy into great companies at more attractive valuations.

We believe there are always interesting opportunities in global markets and that our investment process is well equipped to unearth them, but we believe that selectivity will be vital. Specifically, we are emphasising companies with pricing power and the flexibility to cope in a depressed pricing environment, with the backing of our long-term, global investment themes.

M: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?

R: The global equity team consists of nine investment professionals, with a wide range of backgrounds and varied experience. The team has an average of 18 years of industry experience. The primary source of investment ideas assessed by the team comes from our team of global sector analysts.

There are currently no plans to alter the structure of the team or add additional resource. We continuously assess the resources needed, the capacity constraints and our ability to outperform. We constantly monitor staffing requirements, especially in the areas of portfolio management and research. We aim to strike a balance between the needs of our clients and the operational efficiency of the company, but recognise that our first loyalty is to provide high levels of service and performance to our existing clients.

M: Can you highlight any areas where you feel that the investment team or the investment process can be improved upon?

R: Our investment process is flexible and we aim to improve it by keeping it current/relevant. Our way of doing so is through making sure that our global investment themes evolve with the times. Our investment process follows a tried and tested thematic, fundamentals-orientated investment approach. We believe our ability to construct holistic portfolios, with an emphasis on security selection within the framework of investment themes, is the main source of added value over the long term. As mentioned above there are no plans to alter the team structure, though we continually assess the resources and structure of the team to ensure we can continue to deliver a strong investment proposition to our clients.

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