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John Baylor and Brian Ferguson don’t chase growth stocks. And that’s the approach that helped five- and four-star mutual funds weather this year’s market turmoil. Investors have sought safety and stability this year as high inflation and the Federal Reserve’s interest rate hikes have put an end to the growth-oriented free-money mentality. “What I’m talking about is focusing on the fundamentals in the market,” said Baylor, a portfolio manager at Newton Investment Management, a subsidiary of BNY Mellon. “Companies that generate a lot of free cash flow, that trade at a reasonable price on that free cash flow and that have good balance sheets. I think all of that will be more important over the next 10 years.” That’s probably why BNY Mellon Income Stock (BMIAX; 4 stars at Morningstar) and BNY Dynamic Value Fund (DAGVX; 5 stars) have both outperformed the market this year with an influx of growth stocks, while boasting a proven track record. Strong past returns. Funds managed by Baylor and Senior Portfolio Manager Brian Ferguson are higher in 2022, with 5-year average annualized returns of more than 9%. By comparison, the iShares Russell 1000 Value ETF is down about 6.5% year-to-date through 2022, through Wednesday. “The market is beginning to reward companies that are focused on improving returns with adequate capital, companies that have aging balance sheets and [that] “Right now they have the best balance sheets they’ve had in many, many years,” Ferguson said. A focus on fundamentals At their respective inceptions in 1995 and 2016, both DAGVX and BMIAX focused on consistency and value, and this strategy has gained popularity. A. As investors stop chasing growth in 2022, this and focusing on the company’s core business fundamentals, investors should only benefit from strong free cash flow, sound balance sheets and reasonable valuations. That’s because they use investment strategies: Health care, energy and financials make up the largest sectors, with stocks like Exxon Mobil, Chubb and JPMorgan Chase dominating both funds, according to Morningstar’s top ten holdings. Wants shares. Pay a higher expense ratio of 1.15%, Ferguson’s expense ratio sits at 0.93% on DAGVX, according to Morningstar data. With 83% liquidity in BMIAX and 115% in DAGVX, managers are mercilessly churning out their portfolios. Baylor defends BMIAX’s above-average expense ratio, long term. A proven track record of strong returns justifies the added cost of a seasoned management team.Over nearly two decades, the managers have managed nearly 300 Base points are offered to investors by Alpha, Baylor said. According to Morningstar, DAGVX ranks in the 5th percentile of all comparable funds year-to-date and in the third percentile over five years. BMIAX scores in the 3rd and 9th percentiles, respectively. Energy, financials and other financial stocks make up nearly 30% of both funds’ holdings, reflecting the managers’ view of the sector in an increasingly volatile environment. One of the picks is US Bancorp, which accounts for 2.8% of BMIAX’s portfolio, with a dividend yield of 4.5%, according to FactSet. Shares are down about 24% this year, but a strong management team with prudent decision-making experience supports the investment case, Byler said. Oil prices have recently fallen from levels fueled by the Ukraine war, but Baylor expects energy stocks to continue their upward trend. ExxonMobil is one of the largest holdings in both funds, accounting for more than 4% of their respective assets. The largest U.S. oil company’s new focus on ESG and plans to increase capital spending should benefit its business going forward, Baylor said. The same goes for the diversified refining and liquefied natural gas businesses that are poised to profit from higher prices in Europe. Shares are up 73 percent this year, after Exxon announced earlier this month plans to increase capital spending and ramp up its share buyback program. “With these high oil prices, good refining margins, they’ve been able to build a lot of cash,” Baylor said. “Now they are in a position to return that money to shareholders.” One difference between the funds’ portfolios is Ferguson’s big bet on Berkshire Hathaway, which holds the same weighting in the fund as Exxon. The stock, which trades at a low price-to-book multiple relative to the market, offers “rock-solid fundamentals,” good cash flow and a stable balance sheet, he said. Shares of the conglomerate run by Warren Buffett have risen this year as the famous investor continues to bet on oil stocks like Chevron and Occidental Petroleum. Berkshire, which has steady access to low-cost capital, remains funded even in an environment where rates have risen, Ferguson added. “We think they’re just starting to scratch the surface of how valuable that low-cost, no-cost capital is,” he said. Looking ahead, Baylor expects the fund’s performance tailwind to continue. “A consistent process of looking at those three circles of companies – valuation, trading, momentum and quality fundamentals – will allow us to deliver alpha to clients in the future,” he said.
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