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BNY Mellon American Fund Interview with Matt Griffin, Senior Research Analyst, Director and Deputy Portfolio Manager The Boston Company Asset Management February 2012 ‘Right now we think first of all it's a good environment for large cap growth, we think it's a good environment for the US, based on the economic backdrop that we see, and we think we have the right process. We think we're in a period where stock picking will be rewarded and that's what this process is designed to do.’ Please note that this document has been edited for ease of reading and every effort has been made to maintain its accuracy.
Presenter: Joining me now is Matt Griffin, Senior Research Analyst, Director and Deputy Portfolio Manager on the BNY Mellon American Fun d which is based on the Boston Company US Large Cap Growth Equity strategy which launched in 2005. Matt, what's the aim and the objective of this fund? Matt Griffin: This fund is designed to generate excess return over the performance reference (the S&P 500) on an annual basis, and to do so with a very low risk profile and emphasising stock specific risk and alpha in an analyst-run portfolio where analysts are picking the stocks, deciding the position weights and really driving the performance and driving it through alpha, stock specific alpha. Presenter: Can you explain a bit more about the portfolio construction process? Matt: Sure. It starts with capital allocation. Capital is distributed to each analyst based on the analyst coverage within the benchmark (the Russell 1000 Growth Index). Every stock is mapped to an analyst and that percentage of the benchmark becomes the analyst's allocation of capital. The analyst, each analyst, all 14 of us have the freedom to invest that capital as we see fit to outperform our opportunity set in the benchmark. We have minimum position size rules, we're also not allowed to have underweight stocks, we have to be either zero weight or overweight, and that's effectively how we get stock alpha that analysts are good at reflected in the performance of the portfolio. Presenter: So how do you define risk and how do you manage it within the Fund? Matt: Two main different ways: one is stock specific risk, which you want to maximise because that's what we're doing, we're picking stocks, we want our risk to be around getting those stocks right because that's what analysts are good at doing. The other part of risk would be more factor risk. Factor risk is generated by taking big sector bets by style bias, by unintended factor exposure that could occur if analysts are all doing the same thing by coincidence, so we have mechanisms in place to make sure that we don't have any unintended factor exposure and that factor exposure we do have is meant to happen. And so that's our risk mitigation process. But to back up, the way this portfolio is constructed to begin with, by maximising that stock specific risk through the portfolio construction techniques that we employ, the overall factor exposure and factor risk tends to be very low from the beginning, so we tend to avoid a style bias or too much factor exposure or too much unintended factor risk which helps us to perform, we think, in the majority of environments that we face as investors. Presenter: And what resources have you got to support you on the strategy? Matt: The team is comprised of 14 very senior analysts with a minimum of 10 years each, each covering about 40 to 60 stocks. They all have deep expertise on their area of coverage. We think that given the big dispersion of return performance in each analyst coverage universe that we see consistently which argues for active management, that those analysts that have that expertise, that are closest to the information, that can make efficient decisions based on that information should be able to generate alpha consistently over a market cycle. So those 14 analysts are all very experienced, we also have the broader assets of the Boston Company in terms of our risk group, in terms of our other portfolio teams, so we are the research engine for the large cap equity products at the Boston Company. But we'd leverage our expertise on large cap growth specifically in this product. Presenter: And are you making any key changes to the strategy at the moment? Matt: No, the strategy is based on analysts' information and analysts' opinion. The portfolio will move based on stock by stock, a nalyst by analyst, industry by industry, sector by sector, as analysts see inflexion points and changes in the companies they follow. We think we're closest to that information, we can recognise those
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BNY Mellon American Fund – February 2012
inflexion points on a relatively early basis and act on them because we do not have layers of decision making to get things into the portfolio or to get things out of the portfolio. So there is no major top down view that's pushed down to the analysts, this portfolio is really driven by bottom up fundamental analysis at the company level. Presenter: And when you're speaking to company management, what are they telling you about what's going on at ground level as it were? Matt: Companies have been fairly consistent even over the past six to twelve months, including the period of macro negative sentiment that occurred in the second half of last year around the US debt ceiling and European debt concerns. Companies have been fairly consistent in cautious optimism. There's still uncertainty so they're not investing full steam ahead, not hiring as aggressively and we've seen that in the unemployment data, but we view the environment as modest growth which should be a good environment for growth stocks. Companies would support that view, that what they're seeing would support a 2% to 4% type GDP growth rate in the US which is probably below potential on a long run basis, particularly given where we are in the recovery, but we're going through a period of deleveraging just like everywhere else in the world. But on a relative basis that looks pretty good, so we think the backdrop looks pretty good and that's supported by what we're hearing from companies. The companies that can grow based on how they innovate the product cycles that they create - these should be able to do well in a modest growth environment. Presenter: And is now a good time to be running a growth strategy then, given the low growth that you've just been talking about? Matt: We think so. We really view the world from the stock level and we're finding good stocks and we're finding bad stocks, and the way this process is designed is maximise the good stocks and avoid entirely the bad stocks. One key part of our process is that we do not underweight any positions relative to the benchmark, analysts either have to be overweight or they have to be zero weight. So that forces a lot of decision making, a lot of conviction at the analyst level, helps get that stock specific risk up and keep that factor risk low. As long as we're in an environment where stocks trade in relation to the fundamentals we should do well because we think we'll get those fundamentals right. So as long as we are an environment that supports stock picking, which we view as the majority of the time and definitely right now, we think that's a good environment for large cap growth. Presenter: Now looking at the numbers, the strategy has significantly outperformed the S&P 500 over three years, over five years and since inception 1. Are you pleased with that? Matt: Yes, very pleased. We've been most pleased with the consistency of the process. We try to view this as an all-weather approach that should work in most market environments and that has been the case. If you look at 2008, 2009 and 2010, those were three very, very different years where styles were in and out of favour, our ability to avoid style bias really helped us and we did well in all three of those years. The one year where we would have difficulty is a year like 2011 where there's a big sentiment overhang and stocks start to trade more based on macro sentiment as opposed to real fundamental factors which really didn't change in 2011. But that period is what we would expect to be difficult because that's not a supportive environment for picking stocks. So we really believe in this process and we think it does keep clients in a very good product over time that should outperform in the majority of markets that we face if we're executing properly. Presenter: So you mentioned about avoiding style bias, how else do you think you've managed to produce the results that you have? Matt: It's really hard work by some very good, experienced analysts. It's analyst focused on their coverage universe, taking advantage of the dispersion that we see within each analyst coverage universe, that's what matters. If you measure it over time it's significant, on an annual basis the difference between the top stocks and bottom stocks in each analyst coverage universe is significant enough that if they are right the majority of the time they should generate alpha. And that's the goal of this process and we think we can consistently do that with the team we have in place. Presenter: And so why should investors consider this strategy right now? Matt: Right now we think first of all it's a good environment for large cap growth, we think it's a good environment for the US, ba sed on the economic backdrop that we see, and we think we have the right process. We think we're in a period where stock picking will be rewarded and that's what this process is designed to do. Presenter: Matt Griffin, thank you very much. Matt: My pleasure. 1 As at 30 January 2012, The Boston Company Asset Management, LLC replaced Newton Investment Management Limited as the investment adviser to the sub-fund, which also changed its name from Newton American Fund to BNY Mellon American Fund on the same date . Source: BNY Mellon as at 31/01/2012. Strategy performance is calculated by converting gross of AMC USD returns into GBP and then deducting a notional 1% fee. This data is not GIPS compliant. Strategy performance is calculated as total return including reinvested income net of UK tax and annual charges but excluding initial charge. The impact of the initial charge, which may be up to 4% can be material on the performance of your client’s investment. Performance figures including the initial charge are available on request. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investments you may get back less than originally invested.
For further information please visit www.bnymellonam.co.uk or contact us: Business Development Team 0500 66 00 00 or e-mail
[email protected]. This is a financial promotion and is not intended as investment advice. The information provided within is for use by professional clients and/or distributors and should not be relied upon by retail clients. All information relating to The Boston Company Asset Management, LLC (TBCAM) and the BNY Mellon American Fund (the Fund) has been prepared by TBCAM for presentation by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained are those of TBCAM at the time of filming and are not intended to be construed as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This document may 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. Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and can fall as well as rise due to stock market and currency movements. When you sell your investment you may get back less than you originally invested. Changes in the rates of exchange may affect the value of investments. The Fund can invest in overseas securities which may also generate profits overseas and pay dividends in foreign currencies, which means the fund is exposed to changes in currency rates. The Fund has a concentrated portfolio of stocks due to investment in a single country, giving rise to concentration risk. The Fund has a concentrated portfolio of stocks due to investment in a limited number of securities, giving rise to concentration risk. The Fund may invest in smaller companies. Smaller companies may be riskier and less liquid than larger companies. This means that their share prices may be more volatile. The Fund may use derivatives for efficient portfolio management (EPM) purposes. EPM restricts the use of derivatives for the reduction of risk, the reduction of cost and the generation of additional capital or income with no or an acceptable low level of risk. EPM transactions must be economically appropriate and the exposure fully covered. All of these factors may affect the performance of the Fund. The Prospectus and/or Simplified Prospectus should be read before an investment is made. This document can be obtained from www.bnymellonam.co.uk or by calling 0500 66 00 00. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations. The BNY Mellon American Fund is a sub-fund of BNY Mellon Investment Funds, an investment company with variable capital (ICVC) incorporated in England and Wales under registered number IC27 and authorised by the Financial Services Authority. BNY Mellon Fund Managers Limited (BNY MFM) is the Authorised Corporate Director. BNY Mellon Fund
BNY Mellon American Fund – February 2012
Managers Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1998251. Authorised and regulated by the Financial Services Authority. The investment adviser of the BNY Mellon American Fund is TBCAM. BNY Mellon Fund Managers Limited (BNY MFM) is the Manager. BNY Mellon Fund Managers Limited, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1998251. Authorised and regulated by the Financial Services Authority. ICVC investments should not be regarded as short-term and should normally be held for at least five years. This document is issued in the UK by BNY Mellon Asset Management International Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Services Authority. BNY Mellon Asset Management International Limited, BNY Mellon Fund Managers Li mited, Newton Investment Management Limited and TBCAM and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon Fund Managers Limited is a member of the IMA. CP8110-14-03-2012(3m)
