Dreyfus Global Real
Poised for Opportunity
Braced for greater uncertainty and heightened volatility in 2019, the Real Return team at Newton, a BNY Mellon company, is poised to adapt to whatever conditions lie ahead.
After almost a decade of positive returns in equity markets, the end of last year was enough to remind investors of the potential virtues of strategies that seek to mitigate volatility. There was a see-saw in the fortunes of major equity markets over the course of 2018 with positive returns in the first part of the year wiped out by October and December market falls. Witnessing such indiscriminate market losses across major markets, the Real Return team at Newton admits: there was really “nowhere to hide” during these market routs.
Between the threat of a contracting Chinese economy, heightened risk of a U.S. recession, skittishness over the direction of monetary policies, and political troubles continuing to plague Europe, the team is doubtful that a pick-up in global growth is due any time soon.
Seeking to mitigate risk
Despite global equities advancing 7.8% in the first month of 20191 (the strongest January in history), the Real Return team believes an uncertain backdrop is likely to continue.
When the Global Real Return strategy was designed back in 20042, it was in response to the team’s belief that the investment world was changing. The team viewed the backdrop at the time as showing that investments were no longer purely about the “high return/the-trend-is-your-friend” dynamics it felt typified much of the 1980s and 1990s – and which the team thinks have returned more recently.
Instead, the team believed global financial markets would be characterized by more volatility and lower overall returns. For this reason, in creating the strategy the team wanted to place an emphasis on mitigating volatility, by seeking to achieve a minimum average annual total return of USD 1-month LIBOR plus 4% (before fees and expenses) over a five-year period. This approach has been followed in the Dreyfus Global Real Return Fund too, as a way of encouraging the team to think about mitigating downside risk and to emphasize the asymmetry of returns.
While no future results are guaranteed, recent returns bear out the validity of this approach. Against a background of heightened volatility in both equity and fixed income markets through the close of 2018, the Dreyfus Global Real Return Fund (Class I shares) was +0.55% in December and +1.11% for the full year, Over the same time periods the MSCI World Index (a proxy for developed market equities) was -7.60% and -8.71% respectively (both in USD terms). Meanwhile, the Bloomberg Barclays Global Aggregate Bond Index (a proxy for global bonds) returned 2.02% in December and -1.20% for the full year.3
Positioned for potential opportunities
Although the year has started strongly for global equity markets, the team remains vigilant for signs that the optimism-driven rally is running out steam.
Says the team, “While we have seen some easing of financial conditions in markets, we believe this will be insufficient to arrest the continued gathering of negative momentum and the onset of renewed market turbulence.
“The authorities in China appear set to provide more support in 2019 than in the previous year, but we remain skeptical that this will be in a quantum sufficient to fuel sustained upward momentum in markets, and it does not look likely that we will see a repeat of the combined global stimulus – the so-called Shanghai Accord – that reflated global economies and markets in 2016 and 2017.” The team believes the global economy and financial markets will resume a deflationary course through the year and that this is likely to bring an increasing number of securities on its ‘wish list’ into buying territory.
“In this stage, we anticipate refocusing attention upon return generation rather than solely volatility mitigation. This is likely to involve significantly increasing exposure to favoured equities as more compelling valuations broaden the opportunity set. We also envisage increasing exposure to asset classes such as corporate debt as factors such as elevated corporate leverage, declining profitability and growing liquidity risk conspire to push yields higher,” concludes the team.
1 Source: MSCI All-Country World Index, January 31, 2019.
2 The strategy was first launched in the U.K. then brought to the U.S. as a mutual fund in May 2010
3 Source: Newton, MSCI and Bloomberg, December 31, 2018
Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. To obtain a prospectus, or a summary prospectus, if available, that contains this and other information about a Dreyfus fund, contact your financial advisor or visit dreyfus.com. Read the prospectus carefully before investing. Class I shares are available only to certain eligible investors.
All investments involve risk. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
RISKS: Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Small and midsized company stocks tend to be more volatile and less liquid than larger company stocks as these companies are less established and have more volatile earnings histories. Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Short sales involve selling a security the portfolio does not own in anticipation that the security’s price will decline. Short sales may involve risk and leverage, and expose the portfolio to the risk that it will be required to buy the security sold short at a time when the security has appreciated in value, thus resulting in a loss. The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in the underlying assets. Derivatives can be highly volatile, illiquid, and difficult to value and there is the risk that changes in the value of a derivative held by the portfolio will not correlate with the underlying instruments or the portfolio's other investments.
MSCI World Index: The MSCI World Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of developed markets, including the United States, Canada, Australia, Europe, New Zealand and the Far East.
Bloomberg Barclays Global Aggregate Bond Index: The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S. Newton is a wholly owned subsidiary of The Bank of New York Mellon Corporation.
Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change.
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