Lesson 1: Be ready for a range of outcomes

The fast-changing and unexpected events of 2020 have taught us that you need to be as flexible as possible when managing a portfolio, in order to deal with a range of scenarios. Although arguably many of the fragilities that were exposed were already in evidence prior to the pandemic, during the first quarter of 2020 we experienced the second-fastest bear market in history. In response, we saw an equally historic coordinated global effort from central banks and governments to offset the negative impact of the virus.

Having confidence and a deep understanding of what is held in a portfolio pays off in such conditions. When the force of the repercussions of the pandemic hit markets in March, coupled with a simultaneous oil-price shock, it would have been easy to be wrong-footed. It was vital to be able to quickly assess the implications of the backdrop and identify the winners versus the losers. For example, sectors such as technology were Covid-19 winners as businesses benefited from the enforced lockdowns by increasing their subscriber base. Other areas such as travel and leisure were hard hit, and it was important to avoid those areas which were in the eye of the storm. Those companies with strong brands were able to strengthen their competitive position and were less affected by a temporary fall in demand; indeed, it was a matter of ‘survival of the fittest’.

Lesson 2: Keep calm and carry on

The events of 2020 have shown how interconnected the world has become. When looking at investments, it is important to accept that there will be further surprises and more uncertainty to come. The speed with which policymakers took action with a combination of monetary and fiscal stimulus on an unprecedented scale should give some reassurance, provided the decision makers remain alert. However, as March showed us, the situation can change quickly and savagely as different financial assets become highly correlated. There are times when it is too late to act, and a portfolio needs to be structured to prepare for the unknown. The ability to embed some downside protection and make a careful, measured assessment of the most effective tools to implement is invaluable.

Plant, Beverage, Drink

Central banks are likely to remain influential for the foreseeable future. This is an important factor to acknowledge when constructing a portfolio as there will be times when participation in market upside will make sense. There will be other times when the prevailing risks take centre stage and a more sizeable protective layer will be necessary to cushion on the downside. The pandemic has been a sharp reminder of how common risks affect us all globally and that surprises can come from left field, so it is key to consider all angles when investing and not be too narrow in our vision.

Lesson 3: Invest with purpose

Arguably, this is more of a reminder than a lesson for us as purposeful stewardship of our clients’ assets has been central to our investment philosophy since our inception in 1978. However, the pandemic has put the spotlight on environmental, social and governance (ESG) issues, which are increasingly important in the mix when considering investment opportunities. The global economy is currently going through a series of complex changes in areas such as climate, health and technology. We have had to stop and think not just about how we are treating our planet, but also about social and governance aspects associated with how companies or other entities are run.

These aspects should be embedded in an investment process and considered thoroughly as part of the fundamental analysis of individual holdings; indeed, they will be increasingly reflected in a security’s valuation. It is not a question of why you should integrate ESG issues; it is more a question of why you would not, as without this information you have an incomplete understanding of the factors that may influence financial outcomes. ESG is not a label; it is finance 101.

ESG factors are merely a different set of inputs whose materiality will depend on the sub-industry, the security-specific situation and the time horizon. They are part of a ‘mosaic’ of information to help create a full picture of an investment opportunity, which will enable active, engaged investors to do the best job possible.

Balloon, Ball, Sphere

We have had to stop and think not just about how we are treating our planet, but also about social and governance aspects associated with how companies or other entities are run.

Lesson 4: Big government is here to stay

The scale of monetary-policy intervention in response to the Covid-19 pandemic far exceeds that witnessed in the aftermath of the 2007-8 global financial crisis. One key difference this time is that governments have loosened fiscal policy at the same time: the central-bank ‘put’ is alive and well. Monetary stimulus combined with fiscal injections may eventually give rise to price inflation which exceeds central bankers’ expectations. This has implications for investment portfolios.

There are also repercussions for personal freedoms and the social contract between individuals and governments. There are strings attached from the rescue packages implemented, although it seems that there is currently a willingness to accept the role of bigger government in managing economies.

From an investment perspective this new era is likely to be very different from the previous 30 years. If inflation surges, traditional correlations between equities and bonds may break down: inflation will naturally eat into fixed-income returns, but rising yields can make the stocks of those companies with higher debt levels look less attractive compared to ‘safer’ securities. There is therefore a need to be highly selective and mindful of the impact of greater state intervention which may favour national champions at the expense of those companies with a more globalised approach. Moreover, in such an environment, the appeal of real assets such as gold, which cannot be debased by central banks, increases.

Lesson 5: Future-proof your investments

Against a backdrop that is likely to be unpredictable and volatile, it is important to use the full range of investment tools available, with an eye to maximising liquidity. Government bonds may not be the place to be in 2021, although they have served an effective role in an environment of falling yields. This may necessitate the use of different investment instruments which may have a comparable risk/return profile, enabling them to play a similar role within a portfolio context.

The history of multi-asset investing has shown that different asset classes pull their weight amid the shifting sands of the market backdrop. An asset’s contribution to portfolio returns is largely a function of sound analysis of fundamentals and an ability to calibrate the appropriate level of exposure based on an assessment of the prevailing and future market conditions. In 2020 there were good examples of the value of harnessing a broad mix of return sources. Dialling up the Real Return strategy’s risk level within the equity portion of the portfolio through a combination of small and mid-cap index futures helped generate a solid return towards the end of 2020. Meanwhile, a patient approach to holding gold within the stabilising layer paid off as the precious metal bounced back vigorously, having initially suffered in line with risk assets in the first quarter of the year.

However, although the Real Return strategy achieved high-single-digit returns in 2020, we are not complacent, and recognise the need to constantly evolve the portfolio and ‘kick the tyres’ of our existing investments.


Against a backdrop that is likely to be unpredictable and volatile, it is important to use the full range of investment tools available, with an eye to maximising liquidity.

One common thread running through all these lessons is the need to be flexible and adaptable as the recovery path out of the pandemic will not be a straight line. While we would contend that the economy is in much better shape than during the aftermath of the global financial crisis, fragilities still exist, and we need to take stock from the lessons learned in 2020, not to mention heady valuations in certain areas of the market. As always, experience of different market cycles and the ability to reassess the outlook, should the evidence change, remains key.

Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested.

Past performance is not a guide to future performance. Your capital may be at risk. The value of investments and the income from them can fall as well as rise and investors may not get back the original amount invested. You should read the Prospectus and the Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and the KIID can be found on the strategy page.

BNY Mellon Real Return Fund key investment risks

  • Performance Aim Risk: The performance aim is not a guarantee, may not be achieved and a capital loss may occur. Funds which have a higher performance aim generally take more risk to achieve this and so have a greater potential for returns to vary significantly.
  • Currency Risk: This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund.
  • Derivatives Risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives, the Fund can lose significantly more than the amount it has invested in derivatives.
  • Changes in Interest Rates & Inflation Risk: Investments in bonds/money market securities are affected by interest rates and inflation trends which may negatively affect the value of the Fund.
  • Credit Ratings and Unrated Securities Risk: Bonds with a low credit rating or unrated bonds have a greater risk of default. These investments may negatively affect the value of the Fund.
  • Credit Risk: The issuer of a security held by the Fund may not pay income or repay capital to the Fund when due.
  • Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices.
  • Liquidity Risk: The Fund may not always find another party willing to purchase an asset that the Fund wants to sell which could impact the Fund’s ability to sell the asset or to sell the asset at its current value.
  • Charges to Capital: The Fund takes its charges from the capital of the Fund. Investors should be aware that this has the effect of lowering the capital value of your investment and limiting the potential for future capital growth. On redemption, you may not receive back the full amount you initially invested.
  • Shanghai-Hong Kong Stock Connect and/or the Shenzhen-Hong Kong Stock Connect (‘Stock Connect’) risk: The Fund may invest in China A shares through Stock Connect programmes. These may be subject to regulatory changes and quota limitations. An operational constraint such as a suspension in trading could negatively affect the Fund’s ability to achieve its investment objective.
  • CoCos Risk: Contingent Convertible Securities (CoCos) convert from debt to equity when the issuer’s capital drops below a pre-defined level. This may result in the security converting into equities at a discounted share price, the value of the security being written down, temporarily or permanently, and/or coupon payments ceasing or being deferred.
  • Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the Fund to financial loss.
  • Investment in Infrastructure Companies Risk: The value of investments in Infrastructure Companies may be negatively impacted by changes in the regulatory, economic or political environment in which they operate.

Investment performance – 12-month returns (%)

Mar 20 –
Mar 21
Mar 19 –
Mar 20
Mar 18 –
Mar 19
Mar 17-
Mar 18
Mar 16 –
Mar 17
BNY Mellon Real
Return Fund

Source: Newton, as at 31 March 2021, Newton Institutional Shares 1 (Accumulation) share class (ISIN: GB00B01XJC27). Fund performance calculated as total return including reinvested income net of UK tax and charges, based on net asset value. All figures are in GBP terms. The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available upon request.

The objective of the Fund is to achieve a rate of return in sterling terms that is equal to or above a minimum return from cash (1-month GBP LIBOR) + 4% per annum over five years before fees. In doing so, it aims to achieve a positive return on a rolling three-year basis (meaning a period of three years, no matter which day you start on). However, capital is in fact at risk and there is no guarantee that this will be achieved over that, or any, time period. The Fund will measure its performance before fees against 1-month GBP LIBOR +4% per annum over five years as a target benchmark (the ‘benchmark’). LIBOR is the average inter-bank interest rate at which a large number of banks on the London money market are prepared to lend one another unsecured funds denominated in British pounds sterling. The Fund will use the benchmark as a target for the Fund’s performance to match or exceed because, in typical market conditions, it represents a target that will be equal to or greater than UK inflation rates over the same period and is commensurate with the investment manager’s approach. The Fund is actively managed, which means the investment manager has discretion over the selection of investments, subject to the investment objective and policies as disclosed in the Prospectus.

Grassland, Outdoors, Field

Important information

This is a financial promotion. These opinions should not be construed as investment or any other advice and are subject to change. This article is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that portfolio holdings and positioning are subject to change without notice.

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Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.