Man on Coin Stack

BNY Mellon Mutual Funds: A Deeper Look at the Performance

Man on Coin Stack

The Bank of New York Mellon, officially, has only been in existence since 2007 from a merger, but its roots span all the way back to the birth of our nation. The Bank of New York was founded 232 years ago by the first US Secretary of the Treasury, Alexander Hamilton, and is our oldest banking institution. Understanding the important role of banking in our country, Mr. Hamilton once state, “the tendency of a national bank is to increase public and private credit. The former gives power to that state, for the protection of its rights and interests: and the latter facilitates and extends the operations of commerce among individuals.”

Oh how things change.

Publicly traded on the New York Stock Exchange (TICKER: BK), BNY Mellon is the largest custodial bank in the world and manages over $1 Trillion dollars in assets. Extending its reach from traditional banking, the bank now offers wealth management, investment management, and private equity services to its investors. According to an article in the Wall Street Journal, BNY Mellon generated $2.93 billion in revenue in 2015.

But not all news has been good news for the financial giant. In 2015, they settled a $335 million lawsuit involving foreign exchange fraud that went on for over a decade. According to an article from Bloomberg, “BNY Mellon promised investors the best rates on foreign-exchange deals, then overcharged them and pocketed the difference.”

Having its beginnings trace back to Alexander Hamilton is interesting in and of itself. As a proponent of limited government and personal liberty, Mr. Alexander recognized the interesting coupling of commerce and personal liberty as one potentially allows for the other. In other words, commerce (or capitalism as we know it today) can help facilitate the creation of wealth, which then allows individuals to exercise their personal liberty how they see fit. Logic would dictate that the destruction of wealth would be in conflict with personal liberty.

We have written extensively about the destruction caused by the active management community, but it’s a sneaky type of destruction. By charging excessive fees for inferior investment performance, many of the largest investment management firms have slowly siphoned off the wealth of many investors. What seems like pennies on the dollar in any given year quickly snowballs into a large chunk as costs compound overtime. Pair that with subpar investment performance and all of a sudden we have put investors into a uniquely different financial circumstance.

As we are going to show, the investment acumen of BNY Mellon is nothing close to spectacular. In fact, it is down right terrible. While their investment management wing of their business has generated great profits, they have failed to deliver on their goal of superior investment performance. You can find analyses for fund companies such as:

Our analysis begins with an examination of the costs associated with the strategies. It should go without saying that if investors are paying a premium for investment “expertise,” then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, via an index fund.

The costs we examine include expense ratios, front end (A), level (B) and deferred (C) loads, and 12b-1 fees. These are considered the “hard” costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds. Commissions and market impact costs are real costs associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades taken by portfolio managers. We can estimate the amount of cost associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in 1 year. This is considered an active approach and investors holding these funds in taxable accounts will likely incur a higher exposure to tax liabilities to short term and long term capital gains distributions relative to incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 23 active funds offered by BNY Mellon. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also remember that this is what is considered an in-sample test, the next level of analysis is to do an out-of-sample test (for more information see here).

Fund Name Ticker Turnover Ratio % Prospectus Net Expense Ratio Global Category
BNY Mellon Short-Term US Govt Secs M MPSUX 105.49 0.54 US Fixed Income
BNY Mellon Natl Interm Muni Bd M MPNIX 35.65 0.50 US Municipal Fixed Income
BNY Mellon PA Interm Muni Bd M MPPIX 35.96 0.68 US Municipal Fixed Income
BNY Mellon MA Interm Muni Bd Inv MMBIX 41.79 0.78 US Municipal Fixed Income
BNY Mellon Municipal Opportunities Inv MOTIX 41.90 0.96 US Municipal Fixed Income
BNY Mellon Natl Short Term Muni Bd M MPSTX 34.24 0.50 US Municipal Fixed Income
BNY Mellon NY Intermediate T/E Bd Inv MNYIX 52.79 0.84 US Municipal Fixed Income
BNY Mellon Bond M MPBFX 59.94 0.55 US Fixed Income
BNY Mellon Intermediate Bond M MPIBX 50.80 0.55 US Fixed Income
BNY Mellon Corporate Bond Investor BYMIX 34.56 0.81 US Fixed Income
BNY Mellon Intl Appreciation M MPPMX 12.51 0.83 Global Equity Large Cap
BNY Mellon International M MPITX 112.69 1.03 Global Equity Large Cap
BNY Mellon Intl Eq Income Investor MLIIX 88.45 1.33 Global Equity Large Cap
BNY Mellon Emerging Markets M MEMKX 107.27 1.42 Emerging Markets Equity
BNY Mellon Asset Allocation M MPBLX 30.31 0.87 Moderate Allocation
BNY Mellon Focused Equity Opp Inv MFOIX 74.72 1.11 US Equity Large Cap Growth
BNY Mellon Large Cap Market Opps Inv MMOIX 30.75 1.20 US Equity Large Cap Growth
BNY Mellon Tx-Snstv Lg Cp Mlt-Strat Inv MTSIX 20.63 1.14 US Equity Large Cap Growth
BNY Mellon Large Cap Stock M MPLCX 52.80 0.81 US Equity Large Cap Blend
BNY Mellon Income Stock M MPISX 65.75 0.80 US Equity Large Cap Value
BNY Mellon Small Cap Multi-Strategy M MPSSX 90.30 1.03 US Equity Small Cap
BNY Mellon Small/Mid Cap Multi-Strat Inv MMCIX 110.79 1.19 US Equity Small Cap
BNY Mellon Mid Cap Multi-Strategy M MPMCX 73.87 0.90 US Equity Mid Cap

On average, an investor who utilized an equity strategy from BNY Mellon experienced a 1.05% expense ratio. Similarly, an investor who utilized a bond strategy from BNY Mellon experienced a 0.67% expense ratio. This can have a substantial impact on an investor’s overall accumulated wealth if it is not backed by superior performance. The average turnover ratios for equity and bond strategies from BNY Mellon were 66.99% and 49.31%, respectively.   This implies an average holding period of about 20 months to 2 years, on average. This also implies that BNY Mellon makes investment decisions based on short-term outlooks, which means they trade quite often. Again, this is a cost that is not itemized to the investor, but is definitely embedded in the overall performance. In contrast, most index funds have very long holding periods--decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long term.

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with BNY Mellon’s “expertise.” We compare each of the 23 strategies since inception and against its current Morningstar assigned benchmark to see just how well each has delivered on their perceived value proposition. We have included alpha charts for each strategy at the bottom of this article. Here is what we found.

  • 91% (21 funds) have underperformed their respective benchmarks since inception, having delivered a NEGATIVE alpha
  • 9% (2 funds) have outperformed their respective benchmarks since inception, having delivered a POSTIVE alpha
  • 0% (0 funds) have outperformed their respective benchmarks consistently enough since inception to provide 95% confidence that such outperformance will persist as opposed to being based on random outcomes

It is important to mention that these performance figures do NOT include the front-end load. If an investor paid the front-end load, their return is worse than the results we show here. Not all investors pay the front-end load depending on who sold the fund to the investor, if the fund is in a qualified retirement plan, etc. 

In general, we conclude that BNY Mellon has no expectation of producing above-average returns for their investors. The vast majority (91%) of their funds didn’t beat the average since their inception. The inclusion of statistical significance is key to this exercise as it indicates which outcome is the most likely vs. random-chance outcomes.

Now some readers may believe that we are not properly analyzing performance since we do not take into account risk (Beta). We understand your concern. Because Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio. A better way of controlling for these possible discrepancies is to run multiple regressions where we account for the known dimensions (Betas) of expected return in the US (market, size, relative price, etc.). For example, if we were to look at all of the US based strategies from BNY Mellon who have been around for at least the last 10 years, we could run multiple regressions to see what their alpha looks like once we control for Beta. The chart below displays the average alpha and standard deviation of that alpha for the last 10 years ending 12/31/2015.

As you can see, not a single fund produced an alpha that was statistically significant at the 95% confidence level (green shaded area). This is what we would expect in a well functioning capital market.

Like many of the other largest financial institutions, a deep analysis into the performance of BNY Mellon has yielded a not so surprising result: active management is failing many of its investors. We believe this is due to market efficiency, costs, and increased competition in the financial services sector. As we always like to remind investors, a more reliable investment strategy for capturing the returns of global markets is to buy, hold, and rebalance a globally diversified portfolio of index funds.

We are sure that Alexander Hamilton is rolling over in his grave.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

Here is a calculator to determine the t-stat. Don't trust an alpha or average return without one.
The Figure below shows the formula to calculate the number of years needed for a t-stat of 2. We first determine the excess return over a benchmark (the alpha) then determine the regularity of the excess returns by calculating the standard deviation of those returns. Based on these two numbers, we can then calculate how many years we need (sample size) to support the manager's claim of skill.