"The economy is an ecosystem, not a machine"

Nick Clay, BNY Mellon Global Equity Income Fund Manager, cuts his portfolio holdings to the lowest number in the strategy's 10-year history. He says this is reflective of the current volatile backdrop which has made it more difficult to find attractive income opportunities.

The move, Clay says, is reflective of what he calls a fragile and volatile environment, which has made finding attractive income opportunities more difficult. Against such a backdrop, constructing a portfolio with an asymmetrical returns focus is key, he says.

According to Clay, an income mandate is better suited to this current backdrop because of the compounding effect of dividends. That said, he notes how many companies are featuring unsustainably high yields. “Many income stocks are rubbish right now, which is why a disciplined approach helps. With fewer things to buy I continue to concentrate on more sustainable businesses.”

Clay’s outlook over the coming months remains cautious, as he believes the promises issued by central bankers to ‘do whatever it takes’ has led to a false sense of confidence, creating a system that is far more vulnerable than it needs to be. “The world economy is an ecosystem, not a machine that can be calibrated with experimental policies such as QE,” he says.

According to Clay, a combination of elevated risks and high financial-asset prices (implying low returns) continues to present a largely unattractive opportunity set for investors, and this explains fund’s generally cautious positioning. "Although markets have shown significant volatility so far this year, and have rallied hard from their February lows, we hesitate to speculate on which assets may, or may not, benefit from the injection of yet more monetary stimulus, given that valuations are already stretched. As the experience in Japan this year demonstrates, attempting to pre-empt an extension of the policy-induced ‘risk on’ rally can lead to unanticipated results.”

Over the past year, the Newton Global Income Fund/BNY Mellon Global Equity Income Fund has upped its positions in the UK and US markets, while shaving positions in countries such as Switzerland, Netherlands, France and Sweden. Meanwhile it has retained zero positions in Eastern Europe and Japan over the past 12 months.

At the end of May 2016 the global income portfolio moved up to an almost neutral position on the US with 53% exposure versus the FTSE World index’s weighting of 55%.

Although the position in Switzerland has come back a bit over the past year, at 8.9% the holdings still represent an overweight versus the FTSE World’s 3.2% weighting. However, the one of the largest overweight positions in the portfolio is to the UK market with 18.5%, up from around 14% a year ago. The FTSE World has just over 7% in the UK predominantly in stocks with global exposure.

With respect to sector positions, the Newton Global Income Fund/BNY Mellon Global Equity Income Fund is almost double weight exposed to consumer goods with just over a quarter of the portfolio allocated to such companies; healthcare accounts for more than 15% of the Fund and consumer services is at a somewhat neutral stance of just over 11%. With respect to underweights, Global Equity Income has just under 1.5% in oil & gas, some 7.6% versus the index position of 12.4% in industrials and just c.9% in financials compared to the 21% position it makes up in the index.

Microsoft and Sysco Corp were among the Fund’s top 10 holdings as of the end of May, alongside companies such as Philip Morris, Reynolds American, GlaxoSmithkline and Novartis.