Q&A Series: Invest in world-class equities with BNY Mellon’s long-term strategy

Established in 1784, BNY Mellon is America's oldest bank and the first company listed on the New York Stock Exchange (NYSE: BK). Today, BNY Mellon powers capital markets around the world through comprehensive solutions that help clients manage and service their financial assets throughout the investment life cycle. BNY Mellon had USD45.7 trillion in assets under custody and/or administration and USD1.8 trillion in assets under management as of September 30, 2023. BNY Mellon has been named among Fortune's World's Most Admired Companies and Fast Company's Best Workplaces for Innovators. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation.

BNY Mellon Investment Management’s model encompasses the specialist skills and expertise of seven world-class investment firms. Each brings its own unique investment philosophy, process, approach, and culture—while enjoying the international distribution channels, brand equity, operational infrastructure, support, assistance, and global influence that comes with being part of BNY Mellon. The blending of unique cultures and specialisms in a structure of shared values to power the creation of solutions for clients around the world.

In this edition of our Q&A Series, we take a deep dive into BNY Mellon’s Long Term Global Equity Fund. We are pleased to have BNY Mellon provide its insights on how investors can achieve sustained capital appreciation over a long time horizon.

1.     As the management of this fund falls under your subsidiary firm, Walter Scott & Partners, could you kindly provide further insights into its role as an investment manager? Particularly regarding its investment approach and competitive advantages.

Walter Scott acts as the sub-advisor to the BNY Mellon Long Term Global Equity Fund (‘the Fund’). Since the firm was founded in 1983, stock-specific investment research has been at the heart of its investment philosophy and process. Walter Scott believes that, over time, the returns derived from investing in the shares of a company will reflect the internal wealth generated by that business. By investing in companies believed to be capable of sustaining exceptional rates of internal wealth creation over the long term, superior investment returns can be achieved.

Walter Scott’s competitive advantage is summarised by the following:

• Focus – Global Equities. One investment team. One investment philosophy.
• Long-term investment horizon – A multi-year investment perspective manifests itself in low portfolio turnover. Short-term news flow and quarterly results announcements are monitored only insofar as they impact long-term investment rationale. Exploiting the exceptional power of compound growth requires time and patience.
• Active Management – Benchmark indices play no role in how the firm builds or manages client portfolios. It selects what it believes to be the most attractive long-term investment opportunities.
• In-house and in-depth research – The vast majority of the Research team’s time is spent analysing companies. Its research is exhaustive and rigorous. It is based on both quantitative and qualitative desk-based analysis, as well as on-site visits to meet with management and gain additional insights. It is the superior fundamentals of Walter Scott’s portfolios that drive their outperformance.
• Team-based decision-making – The firm believes that teams make better decisions.
• Integrated ESG approach – Integrity, sustainability and governance considerations are central to the firm’s investment research. The companies that make the best investments over the long-term typically adhere to the highest standards of ESG.

While the firm’s investment philosophy has not changed, a new Additional Objectives Portfolios framework was launched in 2022. This was put in place for clients who want their portfolio to be managed in line with ‘additional’ sustainability requirements, such as the Article 8 fund framework for “the promotion of environmental and social characteristics” set out in the SFDR. The Fund is categorised as an Article 8 portfolio.

2.     Could you elaborate on the "long-term" theme and how this strategic focus contributes to navigating market uncertainties?

Walter Scott’s investment approach is resolutely long-term. The firm has consistently applied the same investment philosophy, which has proved its worth time after time, cycle after cycle. Regardless of short-term market conditions, the firm picks stocks based on the conclusions of its in-house fundamental research. The focus is on finding profitable companies with strong balance sheets, low debt, high rates of internal wealth generation and the ability to self-finance growing earnings over the long term. This is dictated by an investment philosophy that is centred on capturing the exceptional power of compound growth.

3.     With the fund's concentrated portfolio of 40-60 stocks, could you provide insights into the methodology behind stock selection? Could you also shed some light on some of the fund’s top holdings?

The responsibility for picking stocks sits with the Research team. Each investment proposal is scrutinised by the entire team. A stock will only be added to a portfolio if all members of the team agree unanimously to its inclusion and it has been ratified by the Investment Executive (IE). The IE consists of Managing Director, Jane Henderson; Executive Director – Investment and Client Service, Roy Leckie; Executive Director – Investment, Charles Macquaker; Investment Manager, Fraser Fox; and Investment Manager Maxim Skorniakov.

There are five main stages to the process related to stock selection for the fund: idea generation; conviction-building/analysis; the convincing of colleagues; SFDR ‘Article 8’ Suitability Assessment; and ratification by the IE.

Stocks are generally equally weighted at the outset of a portfolio and those that perform relatively well will grow to a higher weight. No single holding can account for more than 5% of the value of the portfolio; there is a mandatory cut imposed when this level is reached. Bearing in mind that stocks are held at a greater weight due to strong performance, the top three in the Fund as of 30th November 2023 are:

Microsoft

Microsoft is one of the world's largest technology companies, with a mission to empower every person and organization on the planet to achieve more. Microsoft strives to create local opportunity, growth, and impact in every country around the world. Its platforms and tools help drive small business productivity, large business competitiveness, and public-sector efficiency. The company develops and supports software, devices, and solutions, including cloud-based services.

Microsoft’s products are deeply embedded in the workflow of its enterprise customers. The company has invested heavily in cloud-enabled technologies and developed a broad set of products covering public, private and hybrid clouds. The commercial cloud business is expected to contribute to strong growth over the long term.

Novo Nordisk

Novo Nordisk is a global pharmaceuticals company based in Denmark. Approximately 90% of sales are in the diabetes and obesity space, with the remainder in rare diseases.

Type 2 diabetes and obesity are global epidemics due to increasingly sedentary lifestyles and Novo Nordisk is well placed to benefit from this as a global market leader in both.

Adobe

Adobe Systems is a leading desktop publishing software provider and competes primarily in the multimedia, graphics & publishing software industry but also the content and document management software market.

A mix of growth, profitability, market leadership and sustainable competitive advantage makes Adobe an attractive investment. The secular tailwinds from digital content creation and digital transformation will continue to power greater than 90% recurring revenue and double-digit revenue growth while commanding +35% operating margins. Furthermore, the powerful 'innovation engine' within Adobe should ensure it is well positioned to develop the software tools that will enable the next generation of the internet in terms of digital engagement and commerce.

4.     Could you offer insights into the fund's industrial allocations and elaborate on the rationale behind these strategic choices?

Walter Scott’s investment approach is bottom-up, meaning companies are selected on the basis of their long-term fundamentals rather than on any thematic, geographical, or sector view. We will only invest in a company if we believe it will perform for our clients over a long-term investment horizon. As such, a Walter Scott portfolio is simply a diversified collection of those companies which the Research team deems capable of delivering our long-term return objective.

That being said, certain themes tend to emerge across portfolios. There is limited, or no exposure to components of the global economy that are in structural decline. Additionally, it is often the case that where we find one company exposed to a particular growth dynamic and with the characteristics we require, we will find others.

In recent years, we have found opportunities in the following areas:

• Industrial automation - As new technologies are adapted across production lines;
• Semiconductor manufacturing - As the proliferation of electronics continues apace;
• Intersection of technology and capital goods - Around the theme of “Industry 4.0” such as the emergence of “as a service” business models;
• Testing industry - Segments such as liquid chromatography, mass spectrometry and haematology have long-term sectoral tailwinds.
• Luxury Goods – Satisfying aspiration.

5.     With reference to its benchmark, how has the fund performed since inception, especially regarding its total returns and drawdowns?

Walter Scott’s approach is not designed to perform in or benefit from any particular market environment. The firm’s objective is to deliver superior returns across every cycle. Historically, however, the Global strategy has captured most, if not all, of the upside in rising markets, while tending to offer a significant degree of downside protection when markets are falling.

Benchmark indices play no role in the management of our client portfolios. We select what we believe to be the most attractive long-term investment opportunities irrespective of sector or geography. Our portfolios will tend to differ markedly from commonly referenced benchmark indices. To provide a performance comparison for clients, we typically compare global portfolios to the MSCI World (the Fund’s benchmark) or MSCI ACWI indices.

Since inception (7 April 2008) to 30 November 2023, the Fund’s performance is 7.1% p.a. (class C USD, net of 1% management fee) vs. 6.7% p.a. for the benchmark, MSCI World (ndr). The maximum drawdown was during the 2008 financial crisis, from May 2008 to 28 February 2009, with the Fund returning -38.9% (net) vs. -50.0% for the benchmark. The Fund recovered after 24 months which was notably quicker than the benchmark, which took 47 months to recover.

6.     Looking forward, what is the fund’s strategy in the next 12 months, taking into account the fund manager's views on interest rates and the growth potential of equities?

Equity markets may face a few hurdles entering 2024, given lingering concerns about economic prospects for the year, and geopolitical ructions. The picture in the US has been relatively rosy, with gloomy forecasts of imminent recession confounded by GDP figures which have highlighted the resilience of the consumer. The jobs market remains tight and wages have been rising, but Main Street is dipping into its savings, judging by the post-Covid decline in the savings rate. A key issue for US economic vigour will be whether or not consumption eventually wilts in the face of lagged effects of higher inflation and elevated interest rates.

Europe continues to flirt with recession, with inflation and higher interest rates taking their toll on business investment and hitherto resilient consumer spending. As with the ‘Fed’, the European Central Bank has not yet declared victory over inflation, although the chances of further interest rate hikes have dimmed considerably.

In Japan, the nascent economic recovery is paradoxically being challenged by the inflation it has long sought, with real wage growth not matching rising prices. The external environment has been a source of caution too, with a number of Japanese manufacturing companies highlighting the ‘sluggish’ environment in China. The problems of the debt-laden Chinese property sector continue to occupy the news headlines, although there have been signs of a more concerted economic recovery. Recent and tentative moves to improve relations between China and the West point to a recognition that despite the de-risking, re-shoring narrative, there remain deep interconnections that are hard to break, while for global companies there remain opportunities to benefit from some of the developing trends that are reshaping the country.

Given this mixed global picture, expectations of a monetary pivot have been rising. Inflation continues to ease and may recede further as world economic growth slows. Although there is little possibility of a return to cost-less money, (and nor should that be welcomed), the prospect of interest rate cuts later in the year would likely further bolster the animal spirits of equity markets.

However, gone are the days of ultra-cheap money and fiscal largesse that have largely characterised central bank and government policy for the past fifteen years, wheeled out at times of economic crises and calamities. The world will have to get used to a higher cost of capital for governments and corporations alike. The ‘TINA’ (There Is No Alternative) argument has lost some of its lustre, given higher bond yields. Sustained high levels of interest rates may provide a test for heightened equity market valuations in some sectors, as well as for businesses that have binged on debt. The demise of Silicon Valley Bank and the forced marriage between enfeebled Credit Suisse and UBS earlier this year highlight the effect of an interest rate reset on weak, highly leveraged business models.

Whatever the prevailing macro currents, Walter Scott’s optimistic view of equities derives from its long-term, bottom-up perspective. There exist many growth trends that will endure despite near-term headwinds. Enterprise and innovation never stop. Not just in the fields of technology and healthcare but across a range of sectors, opportunities will arise for the patient investor, whether they be in enablers of AI, or consolidators in the convenience store market. But not all companies are equal. Against a backdrop of economic uncertainty and the reset in the cost of capital, market leadership, the ability to adapt and innovate, strong balance sheets, good cash generation, and excellent management will be of paramount importance in 2024 and the years ahead.

Important information

This information does not represent and must not be construed as an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products and must not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. Certain investments may only be offered in certain jurisdictions through regulated or licensed entities such as a bank or a broker-dealer. Persons into whose possession this document or any information contained in this document comes are required to inform themselves about, and to observe any, restrictions that apply in their jurisdiction.

Any views and opinions contained in this document are those of Walter Scott as at the date of issue, unless otherwise noted and are subject to change and should not be taken as investment advice. Information contained in this document is not predictive of future performance and does not constitute a recommendation to buy, sell, or otherwise trade any investments which may be referred to. Please note that holdings and positioning are subject to change without notice.

Past performance is not a guide to future performance and returns may increase or decrease as a result of currency fluctuations. Many factors affect investment performance including changes in market conditions, interest rates, currency fluctuations, exchange rates and in response to other economic, political, or financial developments. Investment return and principal value of an investment will fluctuate, so that when an investment is sold, the amount returned may be less than that originally invested.

Unless otherwise stated, returns are calculated gross of advisory fees, and include the reinvestment of dividends. The effect of advisory fees could be material. If the advisory fees were reflected, the performance shown would be lower. As an example of the effect of investment advisory fees on the total value of an account, a three year compound return before the deduction of investment advisory fees of 14.75% would be 13.61% after investment advisory fees of 1.00% per annum.

Where a projected objective is stated, such an objective is not a guarantee of future performance.

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