BNY Mellon Income Stock Fund Q2 2024 Commentary

Describe the performance of the fund relative to its benchmark during the last three months. BNY Mellon Income Stock Fund (Class I shares) underperformed its benchmark, the Dow Jones U.S. Select Dividend Index, during the second quarter of 2024. On a sector basis, financials and materials were the largest contributors, while utilities and information technology detracted.

Market Review

Equity markets were mixed in June as political turmoil picked up in Europe and the Middle East crisis intensified. Several major central banks began to loosen monetary policy, with the Bank of Canada, the Swiss National Bank and the European Central Bank (ECB) lowering borrowing costs. However, the US Federal Reserve (Fed) and the Bank of England (BOE) left rates unchanged. The S&P 500® Index jumped 3.59%, the MSCI EAFE Index, a measure of non-US developed markets, lost 1.61%, while the MSCI Emerging Markets Index added 3.94%. US growth stocks gained, again outperforming their value peers, which declined for the month; large caps outperformed small caps.

In the US, equities again rose as investors carefully parsed through economic data and Fed speeches for further clues on when the central bank might begin to cut rates. At its June meeting, the Fed held rates steady, and central-bank officials indicated that they would need to see further progress toward their inflation goal of 2% before rate cuts could commence. Preliminary June purchasing managers’ index (PMI) data was above forecasts; however, retail sales dropped. Inflation, as measured by the consumer-price index, cooled more than expected in May, while the Fed’s preferred inflation measure, the core personal-consumption expenditures index, was in line with expectations. On the supply side, the producer-price index experienced its largest decline since October 2023 as gasoline prices dropped. The yield on the 10-year US Treasury fell, while the US dollar moved higher.

Developed international markets were lower for the month due to the threat of a major shift in Europe’s political landscape. Uncertainty spiked as French President Emmanuel Macron called an early parliamentary decision, while UK markets were calmer awaiting the country’s general election. Political turmoil in France upended the ECB’s first interest rate cut since 2019. Switzerland cut rates for the second time in three months, while the BOE left rates steady. Eurozone business activity accelerated as services growth expanded. In France, inflation slowed to a 34- month low. The UK avoided a recession, as gross domestic product increased in the first quarter. The Bank of Japan left short-term interest rates unchanged, announcing that it would reduce government-bond purchases and outline its quantitative tightening in July. However, reports of a significant downward revision to first quarter growth, due to a change in construction order data, could affect monetary policy. Japanese stocks rallied during the month as the yen weakened versus the US dollar.

Emerging market equities gained in June. Indian equities moved higher as Prime Minister Narendra Modi was sworn in for a record-equaling third term, although his Hindu nationalist party lost its outright majority in parliament in a surprise election verdict. In emerging Asia, weakness in China’s economy dampened sentiment, and the yuan slipped to a multi-month low. To stimulate exports, the People’s Bank of China (PBOC) repeatedly weakened the yuan’s daily reference rate during the month. The PBOC also signaled that it may update its monetary-policy toolkit, which could include treasury-bond trading in secondary markets and simplifying current policy to one short-term rate. On a more positive note, the China Caixin manufacturing PMI, which measures factory activity among smaller Chinese manufacturers, rose at the fastest pace since 2021 as foreign orders pushed the print ahead of economists’ expectations. Hong Kong stocks declined amid weak growth prospects in China. Brazil’s central bank increased its economic growth forecasts and inflation projections, leaving interest rates unchanged for the month. The Bank of Mexico also kept rates on hold despite increasing inflation data, while Colombia cut its benchmark rate.

Commodities slipped during June. Oil prices gained, as geopolitical turmoil escalated in the Middle East and the Russia/Ukraine war continued. Declining gasoline stockpiles also supported crude prices. The price of gold moved in tandem with the prospect of interest rate cuts, ending the month lower but recouping some gains by the end of June. The Dow Jones Commodity Index, which holds its largest weighting in gold, ended the month 0.97% lower.

Sector Review

Positive Impacts

Financials: Solid performance by bank names drove returns for the financials sector during the quarter. A position in Goldman Sachs Group (GS) contributed returns in capital markets.

Materials: Effective stock selection within the materials sector contributed, particularly in the metals and mining space.

Negative Impacts

Utilities: An underweight and unfavorable stock selection weighed on relative returns for the period. Information Technology: An overweight to the IT services subsector detracted from returns during the quarter.

Stock Review

Positive Impacts

Walgreens Boots Alliance, Inc. (WBA): Shares in Walgreens Boots Alliance fell during the quarter after the drugstore chain cut its profit outlook and announced more store closures, citing a difficult pharmacy business and strained American consumers.

Applied Materials, Inc. (AMAT): Shares of the semiconductor capital equipment manufacturer rallied over the period as the market realized the company would be a large beneficiary of increased spending around generative artificial intelligence.

Goldman Sachs Group, Inc.: 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.

Negative Impacts

Kenvue, Inc. (KVUE): 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.

Medtronic Plc. (MDT): Shares of the medical device maker were weak over the quarter after the company reported robust quarterly earnings but tempered their earnings and growth outlook for the remainder of the year.

Intel Corporation (INTC): Intel reported 8.6% growth (year-over-year) in the first quarter, in line with expectations, but provided weak guidance for the second quarter (flat growth year over year), prompting analysts to reduce consensus the company’s growth forecast.

How is the fund currently positioned and what is your current strategy?

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 US 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 US – 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, this “new” 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 will 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.

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.