BNY Mellon Funds Q2 2024 Commentary: Global Equity Income and Dynamic Value Funds Performance Analysis

BNY Mellon Global Equity Income Fund Q2 2024 Commentary (Mutual Fund:DEQAX)

The fund benefited most from stock selection in the basic materials and industrials sectors. The team believes an environment of slower growth, higher rates and high inflation represents a relatively favorable backdrop for income stocks. The fund outperformed market weakness in April, but this advantage was lost over the last two months of the quarter as a greater appetite for risk prevailed. The fund's underperformance was attributable in large part to the underweight in the technology sector and stock disappointments within the financials and consumer sectors. The zero weightings in Nvidia, Apple and Alphabet were among the biggest detractors over the quarter. The fund cannot invest in these stocks owing to their insufficient yields. The fund benefited most from stock selection in the basic materials and industrials sectors. BNY Mellon Global Equity Income Fund underperformed its benchmark index, the FTSE World Index ("the index"), during the second quarter of 2024. Average Annual Total Returns (6/30/24) Miner Newmont (NEM) benefited from the rising price of gold, with the precious metal proving attractive to investors as a low-risk asset amid heightened global geopolitical tensions. It also reported good results, with both production and costs beating expectations. A positive contribution came from AstraZeneca (AZN), which recently re-entered the strategy's yield universe leading to its reintroduction to the Strategy. The pharmaceutical giant reported a strong start to the year, in which revenue and earnings exceeded expectations. A top contributor was the fund's recent purchase, International Paper, which was the subject of a takeover approach from Suzano, the largest paper and pulp company in Latin America, which served to highlight the attractive valuation of the stock. A further contribution came from packaging, paper and recycling business DS Smith (OTCPK:DITHF), as the withdrawal of Suzano's takeover offer for International Paper removed the uncertainty over the latter's acquisition of DS Smith. The largest detractor was the zero weighting in Nvidia, as the chip developer upgraded its second-quarter revenue estimates. The shares were boosted later in the quarter, as the company made well-received new product announcements. The zero weighting in Apple detracted as second-quarter earnings marginally exceeded market estimates, despite falling iPhone sales. The company also announced its largest ever share buyback program. Apple's share price rose further later in the quarter as the company unveiled its long-awaited artificial intelligence strategy. Not holding Alphabet was a negative, as the stock performed strongly over the period as earnings estimates for the company moved higher. Better news flow around its AI offering also improved investor sentiment towards the stock, as did the announcement of a first dividend, alongside the stock repurchase program. Shares in Brazilian stock exchange operator B3 underperformed as the currency weakened and real yields remain stubbornly high in Brazil, delaying the anticipated increased demand for equities. The holding in Bank Rakyat (OTCPK:BKRKY) declined early in the quarter as Indonesia's central bank raised borrowing costs in response to reduced expectations of imminent US rate cuts. The high rates on offer in the US and demand for low-risk assets are also leading to capital outflows from Indonesia. However, the Indonesian economy remains fundamentally strong, and the stock continues to offer good exposure to the growing wealth in the economy. Derivatives marketplace CME underperformed as investors continued to anticipate a decline in trading volumes. The team believe that the next decade can be better for CME than the previous one, given the fundamental change in the backdrop, as higher-for-longer interest rates lead to greater volatility and more trading of derivatives, and yet the stock trades towards the bottom of its historic valuation range. Shares in Diageo (DEO) weakened over the quarter, as the drinks group continued to be hampered by slowing sales growth. The team added two new stocks in the industrials sector. The team bought Compagnie de Saint-Gobain (OTCPK:CODGF), which is a France-based group specializing in the design, manufacture and distribution of materials and solutions. The current chief executive officer has transformed the underlying operational strategy of the business, improved capital allocation and raised through-the-cycle profit margins. The new business mix, which is more exposed to spending on energy-saving initiatives, has the potential to weather both cyclical and geopolitical uncertainties better than in the past. Late in the quarter, the team bought a modest position in packaging, paper and recycling business DS Smith, ahead of the completion of its takeover by International Paper, with the shares trading at a steep discount to the bid price. The discount was caused by uncertainty surrounding the takeover given the possible acquisition of International Paper by Suzano. Given the balance sheet leverage at Suzano the team saw this deal as unlikely and indeed Suzano withdrew the bid at the end of the period. Within the health-care sector, the team sold the position in Bayer, with the stock breaching the strategy's yield discipline following its dividend cut. The team also completed the sale of US biopharmaceutical company AbbVie, which has outperformed the rest of the sector. The team bought Swiss pharmaceutical business Novartis (NVS). The team believed that near-term product launches can ensure that upcoming patent expiries are more than manageable, driving potentially stronger revenue and earnings growth than currently anticipated by the market. Improved research and development productivity and commercial execution also appeals. The team also bought UK pharmaceutical giant GSK (GSK). The company has concentrated its capabilities, spun out its consumer-health business and become a focused vaccine and pharmaceutical company. The team believed that the company's pipeline of products had more potential than the valuation of the stock was discounting, and, with a refreshed balance sheet, the company should be able to focus on investing for growth. In the consumer discretionary sector, following positive performance, the team sold GPS technology company Garmin, as it had triggered the fund's sell discipline. The team took advantage of share-price weakness following the Mexican election to establish a holding in Wal-Mart de Mexico (OTCQX:WMMVY) which adheres to a tried and tested retail model which strives to keep low prices and a great value proposition to its customers. It has a significant scale advantage over its rivals and has plenty of room to grow. The company uses its buying power to drive down the cost of goods sold, reinvesting this gross margin into prices, which subsequently drives same-store-sales growth and market share gains. In addition, the e-commerce market remains relatively nascent in Mexico, which presents the company with the chance to capture a large share of this growth. In the basic materials sector, the team bought International Paper (IP), which is a global producer of sustainable packaging, pulp and other fiber-based products. The team believe that the paper industry has moved past the significant destocking seen in 2023 and, as destocking shifts to restocking, this can lead to a pickup in box demand growth. The other significant attraction of the stock comes via the new chief executive, who is well regarded and has a strong track record. His appointment could be the catalyst that the company needs to re-establish its focus on cash earnings and return on capital. The team also sold Anglo American following the takeover approach from mining peer BHP. The team believed that there could be material downside to the share price if an accepted bid did not materialize, and limited upside, and an extended timeframe, to any realistic increased offer. The complexity of Anglo American's assets was also a significant factor. BHP withdrew its offer for the company shortly afterwards. Elsewhere, following strong performance, the team sold the holding in Taiwanese semiconductor business MediaTek owing to its high valuation and on concern that the smartphone restocking cycle is over. While headline inflation has been falling and a peak in global interest rates may have been reached, core inflation is unpredictable, and the team believes it will most likely remain so as a result of long-term trends, such as deglobalization and decarbonization. The team's view is that, to combat inflation, interest rates will have to remain higher for longer, and the team continues to see expectations for rate cuts being pushed out. Critically, the era of free money that the team believes has been so beneficial for growth stocks may be now over. The valuation of income stocks remains compelling. At the time of writing, stocks offering income at above-average rates continue to trade at a substantial discount to low-income stocks on price-to-earnings and price-to-book bases. Recent market moves have only served to increase that discount, which is sitting at an equivalent level to that seen in 2000, when the technology bubble burst. Currently, the 'magnificent seven' technology stocks (Apple, Alphabet, Meta, Amazon, Microsoft, Nvidia and Tesla) make up approximately 18% of the FTSE World Index. Given its strict yield discipline, the strategy has zero weightings in these stocks and instead has key overweight sector positions in consumer staples, health care and utilities. These are balanced with an overweight in defensive financials, which the team expects to benefit from strong pricing power in a world of higher interest rates. Stocks from these sectors dominate the top 10 overweight positions in the portfolio. The fund is not a global growth portfolio and is positioned differently from the global equity market, seeking valuable diversification to passive and growth-orientated portfolios. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

BNY Mellon Dynamic Value Fund Q2 2024 Commentary

As we cross the halfway point of 2024, we maintain our 'balanced' approach to the markets and value investing. Pulling back from the immediate term, we continue to believe that companies and investors alike are still adjusting to the normalization of both inflation and interest rates in the US. Equity markets ended the second quarter mixed as central-bank activity began to diverge. Canada, Sweden, Switzerland and the European Central Bank (ECB) cut rates, while the U.S. Federal Reserve (Fed) waited on further evidence of slowing inflation. The S&P 500® Index added 4.28%, the MSCI EAFE Index, a measure of non-U.S. developed markets, retreated -0.42%, while the MSCI Emerging Markets Index jumped 5.00%. Bifurcation, or disjointed market movements, continued in the quarter, as artificial intelligence powered U.S. growth stocks, which significantly outperformed their value peers, while small caps lagged and underperformed their large-cap counterparts. BNY Mellon Dynamic Value Fund (Class A at NAV) returned -1.47% during the second quarter of 2024. In comparison, the fund's benchmark, the Russell 1000 Value Index (the "Index"), returned -2.17% for the same time period. In the U.S., markets reached new all-time highs, with technology stocks again leading the charge, buoyed by AI enthusiasm. Corporate earnings were largely in line with, or above, analysts' expectations while Nvidia's (NVDA) market capitalization surged from $1 trillion to over $3 trillion in just 12 months. However, market gains were largely concentrated in just a few sectors, namely information technology and communication services, while other sectors declined. The Federal Open Market Committee left interest rates unchanged as officials continued to express concerns about pricing pressures. With inflation measures slowly easing, markets are now pricing in a September rate cut. While U.S. Treasury yields experienced a spike following weak auction demand, the 10-year note ended the quarter roughly where it began. The U.S. dollar ended the quarter higher. Developed international markets retreated in the second quarter. Investor sentiment quickly shifted from optimism over the ECB's early June rate cut -- its first since 2019 -- to uncertainty following French President Emmanuel Macron's calling for a shock parliamentary election. As inflation returned to the ECB's 2% target, the central bank cut its deposit rate by 25 basis points. Inflation in the UK fell less than expected; the Bank of England held rates steady but is expected to reduce rates this summer. The Bank of Japan (BOJ) left interest rates unchanged for the quarter, disappointing traders who were looking for hints of further rate increases. The BOJ's decision accelerated yen weakness, despite interventions over the quarter by Japanese authorities to prop up the currency. The yen's continued weakness increased monetary tightening expectations in Japan. While European stock markets declined, Japanese stocks rallied in the quarter. Emerging-market equities advanced and outperformed their developed-market counterparts, led by gains from China and India. Markets reacted positively to wide-ranging stimulus from China -- the world's second-largest economy -- to support its property markets, as well as to positive earnings reports from several bellwethers. Given Taiwan's crucial role in the AI supply chain, Taiwanese stocks surged ahead along with the U.S. technology sector on AI enthusiasm. Indian equities moved higher as Prime Minister Narendra Modi, who reassured markets with pro-growth policies, was sworn in for a record-equaling third term. In Latin America, Brazil's central bank increased its economic growth forecasts and inflation projections, leaving interest rates unchanged for the quarter and raising the possibility of rate hikes. In Argentina, markets rallied at quarter end following the approval of free-market overhauls and fiscal measures designed to attract investment and revive the country's economy. Commodities gained for the quarter. Energy prices ended flat but were volatile over the period. Crude prices rose on increased geopolitical tensions, then declined on supply concerns following a decision by the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) and its Russia-led allies to gradually unwind a complex array of production cuts. Metals registered solid performance, as copper prices soared and gold reached an all-time high on continued hopes for Fed easing. The Dow Jones Commodity Index, which holds its largest weighting in gold, added 3.22% for the second quarter. The fund (Class A shares at NAV) outperformed its benchmark, the Russell 1000 Value Index, during the second quarter of 2024. Stock selection in the health care and industrials sectors contributed, while selection in energy and an underweight to consumer staples detracted. Positive Impacts Health Care: Stock selection in the health care sector contributed to quarterly returns, particularly in the pharmaceuticals space. Industrials: Stock selection in the sector also contributed, particularly not owning several underperforming machinery names. Negative Impacts Energy: Stock selection in the energy sector weighed on relative returns as oil prices have come under pressure, especially our position in Phillips 66. Consumer Staples: Stock selection in the defensive consumer staples sector detracted, most notably due to the position in Kenvue. Positive Impacts Newmont Corporation: Shares of one of the world's leading gold miners, Newmont, rose after reporting results that beat expectations on both production and costs. In addition, the firm continues to benefit from the increase in the gold price. Goldman Sachs Group: As one of the best-positioned banks for an economic soft landing in our view, Goldman Sachs performed well as investment banking volumes have continued to move higher. Alphabet Class A: Shares of Alphabet rose over the period on sustained enthusiasm by investors for the market leaders in AI, cloud and search services. Negative Impacts Kenvue: Kenvue, whose core business is over-the-counter (OTC) medicines, saw weakening sales over the past quarter, given a more muted cold and flu season versus last year. Kenvue is also a skincare business with mass-market pricing; this section also performed poorly due to intense competition from "indie brands" and mis-execution from the management team. Phillips 66: Following a strong start to the year, shares of Phillips 66 were weak over the period. The company reported results below market expectations and provided a muted outlook on demand for the remainder of 2024. CRH public limited company: Following strong stock price appreciation to start the year, shares of building materials company CRH took a breather as investors took some profits and considered the potential changes in fiscal spending around infrastructure ahead of the US elections. As we cross the halfway point of 2024, we maintain our "balanced" approach to the markets and value investing. While consensus expectations for interest rates are more aligned with the Fed's guidance today than it was at the start of the year, it remains the top macro concern for many investors. Given the uncertainty around the trajectory of both inflation and economic growth, we believe it's prudent to consider a wider dispersion of potential outcomes. Furthermore, the upcoming U.S. elections are now taking up more investor mindshare. While still relatively early in the campaign season, it has already been eventful and will likely lead to added uncertainty around potential outcomes and, therefore, volatility. From an investment perspective, as bottom-up, fundamental stock pickers, we will continue to view these macro risks through the lens of the companies in which we look to invest and lean on our investment process to identify the best idiosyncratic opportunities. Pulling back from the immediate term, we continue to believe that companies and investors alike are still adjusting to the normalization of both inflation and interest rates in the U.S. -- not to pre-pandemic levels, but to pre-global financial crisis levels. In other words, we expect inflation to be higher and more persistent than in the 12 years leading up to the pandemic, which will cause interest rates to likely be higher as a result. While we acknowledge that inflation has moderated off its peak and is headed in the right direction, and monetary policy will likely follow in due course, we firmly believe that the days of "benign" inflation and "free money" are now behind us. On the political front, while we do not have an edge on the potential outcome, we are closely monitoring our holdings with exposure to things like fiscal policy, infrastructure spending, and deglobalization. Similar to macro outcomes, the current environment is leading to a wider dispersion of returns among companies. As a result, going forward, we believe that fundamentals, valuations and the ability to generate "in-house" liquidity via free cash flow can now play a larger role in separating the winners from losers. As always, we favor companies sitting at the nexus of robust fundamentals, attractive valuations and catalyst-driven business momentum. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.