Navigating the changing investment landscape
After years of slow growth, the U.S. economy has been seeing positive territory. Growth has been stronger than expected. The labor market continues to strengthen, with record-low unemployment and steadily rising wages. The U.S. dollar has strength relative to other world currencies.
The economy’s continued strength along with potentially rising prices has the Federal Reserve on alert about the potential for inflation. The central bank raised short-term interest rates four times in 2018, and plans two additional increases in 2019. U.S. Treasury yields are rising along with the Fed funds rate.
How might this impact fixed income investments?
Historically, interest rates and bond prices have been inversely correlated. That is, when rates go up, bond prices tend to go down. This could cause a loss of principal in bond mutual funds.
In a rising rate environment, it’s important to look for potentially flexible, well-diversified fixed income investments. By going beyond static “set it and forget it” bond funds, investors can navigate rising rates and potentially take advantage of a broader range of opportunities.
The opportunistic approach of the BNY Mellon Insight Core Plus Fund
The BNY Mellon Insight Core Plus Fund is a diversified fund focused on U.S. and foreign fixed income. Its goal is to deliver attractive risk-adjusted returns over the course of a full market cycle – in times of rising as well as falling rates.
The Fund seeks to take advantage of a wide range of opportunities across U.S. and global fixed income markets. It pursues total return from active management of interest rates, credit, sectors and maturities, and can take opportunistic positions in currencies. The Fund is designed to potentially limit the magnitude of potential market downturns.
Seeking better participation in the upside and less on the downside
The Fund seeks to offer several important benefits. First, the Fund is transparent, and primarily invests in liquid securities. Investors know what the Fund’s portfolio holds, and can trade Fund shares regardless of market conditions. The value of those shares will, of course, fluctuate.
Next, the portfolio managers have the ability to actively position the Fund in areas of the market they believe have an optimal risk/reward relationship. They seek to invest in sectors and securities they believe offer superior total return potential, while taking only those risks that are well-compensated.
Risk management is integral to the Fund’s investment process. The managers seek to maintain appropriate diversification in the Fund, carefully managing the size of each position. They seek uncorrelated sources of risk-adjusted return within the Fund and relative to fixed income and equity markets. This offers investors greater diversification and the potential to dampen volatility. Of course, no investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
The Fund pursues three key sources of return
The BNY Mellon Insight Core Plus Fund seeks to add value through active management of:
- Duration and yield curve positioning
- Credit and sector allocations
- Security selection
The managers can opportunistically use market allocation and currency selection as additional potential sources of return.
Duration and yield curve positioning
The team develops its strategic view on the direction of interest rates using fundamental economic analysis. They also consider shorter-term market views and momentum. Using this forecast, they can adjust the Fund’s interest rate positioning to be defensive or opportunistic.
In a rising interest rate environment, the Fund will typically reduce its duration, or sensitivity to changes in interest rates. The portfolio managers may also increase the Fund’s exposure to non-government securities in an effort to diversify away from rising Treasury rates.
Credit and sector allocations
The Fund seeks to take advantage of relative value across U.S. and foreign fixed income sectors, subsectors, issuers and capital structures. The team conducts in-house credit assessments of sectors and individual bonds. Their goal is to create a forecast that anticipates credit risk ahead of the rating agencies.
The portfolio managers actively adjust sector exposures, underweighting those their research indicates are overvalued in favor of sectors that they believe are attractively valued. For example, areas of the corporate bond market where balance sheets are strong would receive a larger portion of the Fund’s assets than those with weak financials.
The portfolio managers select individual securities for the Fund based on independent fundamental analysis conducted by the Insight fixed income team. The team generates a proprietary credit rating for each security, as well as a credit outlook that seeks to anticipate upgrades or downgrades. The process also generates an analysis of the relative value of each bond. Bear in mind, the team’s analysis is subjective, subject to change, and is no guarantee of how a security will ultimately perform.
To learn more about the approach of the BNY Mellon Insight Core Plus Fund, call 800-443-9794 to speak to a Dreyfus representative.