reduced the federal funds rate three times, bringing the target rate to 1.50-1.75%. Other major central banks also took actions to support their economies.
Stocks rallied in response, and as investors became optimistic about a U.S.-China trade agreement. Talks culminated in the announcement of a “Phase One” deal, reducing tensions between the world’s two largest economies. Stocks also benefited from the approval of the new U.S.-Mexico-Canada Trade Agreement by the U.S. House of Representatives, potentially reducing trade uncertainty with America’s neighbors.
However, in 2020, markets experienced a correction, amid growing concerns about the COVID-19 in China, erasing the gain that occurred late in 2019 and early in 2020. In response, the Fed reduced the federal funds rate by 50 basis points early in March 2020, bringing the target rate down to 1.00–1.25%. The Fed made another cut in mid-March 2020, bringing the federal funds rate target to 0.0-0.25%.
In addition, the Fed and other central banks initiated various programs to ease liquidity concerns in certain markets, and government authorities introduced programs to keep small businesses afloat and provide relief to employees who had lost their jobs as a result of government-mandated business shutdowns. At the end of the reporting period, markets began to rebound, as these programs took effect, and investors began to anticipate the end of government shutdowns designed to slow the spread of the virus.
The fund’s performance compared to the Lipper Index was driven by relatively weak results from some of its underlying funds. The BNY Mellon Global Real Estate Securities Fund was the leading contributor to underperformance. Although this underlying fund beat its benchmark by more than 300 basis points, returns to the global real estate market were down dramatically. The Boston Partners Long/Short Research Fund also contributed negatively, as that underlying fund lagged its benchmark by 600 basis points, and the benchmark was also down significantly. In addition, the ASG Global Alternatives Fund contributed negatively to performance, as it lagged its benchmark by more than 400 basis points and was slightly overweight versus the Lipper Index.
On a more positive note, the fund’s performance was assisted by the Neuberger Berman Long/Short Fund, which outperformed its benchmark by more than 900 basis points. An overweight position in managed futures also contributed positively to performance, as both the AQR Managed Futures Strategy Fund and the ASG Managed Futures Strategy Fund beat their benchmark by more than 120 basis points and more than 300 basis points, respectively.
The fund made no changes to its allocations among the underlying funds during the reporting period.
It is our opinion that the current economic downturn will eventually pass. The fund continues to be invested in line with the fund’s investment adviser’s best thinking, and
we believe it is well-positioned to weather the current environment. We believe that asset classes with low correlations to equity markets should provide a buffer to client portfolios. In addition, we believe the fund is well-positioned for market volatility, which we expect to continue. The fund’s various diversification strategies can help reduce the impact of heightened market volatility on investors’ overall investment portfolios, and we intend to continue to mitigate the risks of investing in stocks and bonds by diversifying across several alternative asset classes.
May 15, 2019
1 Total return includes reinvestment of dividends and any capital gains paid, and does not take into consideration the maximum initial sales charge in the case of Class A shares, or the applicable contingent deferred sales charge imposed on redemptions in the case of Class C shares. Had these charges been reflected, returns would have been lower. Share price, yield and investment return fluctuate such that upon redemption, fund shares may be worth more or less than their original cost. Return figures provided reflect the absorption of certain fund expenses pursuant to an agreement by BNY Mellon Investment Adviser, Inc. in effect until February 28, 2021, at which time it may be extended, terminated, or modified. Had these expenses not been absorbed, the fund’s returns would have been lower. Past performance is no guarantee of future results.
² Source: Lipper Inc. — The S&P 500® Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. The Lipper Alternative Multi-Strategy Funds Index consists of funds that, by prospectus language, seek total returns through the management of several different hedge-like strategies. These funds are typically quantitatively driven to measure the existing relationship between instruments and in some cases to identify positions in which the risk-adjusted spread between these instruments represents an opportunity for the investment manager. Investors cannot invest directly in any index.
Equities are subject generally to market, market sector, market liquidity, issuer and investment style risks, among other factors, to varying degrees, all of which are more fully described in the fund’s prospectus. Bonds are subject generally to interest-rate, credit, liquidity, call, sector and market risks, to varying degrees, all of which are more fully described in the fund’s prospectus.
Investing internationally involves special risks, including changes in currency exchange rates, political, economic, and social instability, a lack of comprehensive company information, differing auditing and legal standards and less market liquidity. These risks generally are greater with emerging-market countries than with more economically and politically established foreign countries.
Short sales involve selling a security the fund does not own in anticipation that the security’s price will decline. Short sales may involve substantial risk and leverage, and expose the fund to the risk that it will be required to buy the security, sold short, at a time when the security has appreciated in value, thus resulting in a loss to the fund. Short positions in stocks involve more risk than long positions in stocks because the maximum sustainable loss on a stock purchased is limited to the amount paid for the stock plus the transaction costs, whereas there is no maximum attainable price on the shorted stock. In theory, stocks sold short have unlimited risk. It is possible that the market value of securities the fund holds in long positions will decline at the same time that the market value of the securities the fund has sold short increases, thereby increasing the fund’s potential volatility. Leveraging occurs when the fund increases its assets available for investment using borrowing or similar transactions. Short sales effectively leverage the fund’s assets. The use of leverage may magnify the fund’s gains or losses.
Exposure to the commodities markets may subject the fund to greater volatility than investments in traditional securities. The values of commodities and commodity-linked investments are affected by events that might have less impact on the values of stocks and bonds. Investments linked to the prices of commodities are considered speculative. Prices of commodities and related contracts may fluctuate significantly over short periods due to a variety of factors.
The fund may, but is not required to, use derivative instruments. A small investment in derivatives could have a potentially large impact on the fund’s performance. The use of derivatives involves risks different from, or possibly greater than, the risks associated with investing directly in the underlying assets.
The ability of the fund to achieve its investment goal depends, in part, on the ability of BNY Mellon Investment Adviser, Inc. to allocate effectively the fund’s assets among the investment strategies and the underlying funds.
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others. To the extent the fund may overweight its investments in certain countries, companies, industries or market sectors, such positions will increase the fund’s exposure to risk of loss from adverse developments affecting those countries, companies, industries or sectors.
5
UNDERSTANDING YOUR FUND’S EXPENSES(Unaudited)
As a mutual fund investor, you pay ongoing expenses, such as management fees and other expenses. Using the information below, you can estimate how these expenses affect your investment and compare them with the expenses of other funds. You also may pay one-time transaction expenses, including sales charges (loads) and redemption fees, which are not shown in this section and would have resulted in higher total expenses. For more information, see your fund’s prospectus or talk to your financial adviser.
Review your fund’s expenses
The table below shows the expenses you would have paid on a $1,000 investment in BNY Mellon Alternative Diversifier Strategies Fund from November 1, 2019 to April 30, 2020. It also shows how much a $1,000 investment would be worth at the close of the period, assuming actual returns and expenses.
| | | | | | | |
Expenses and Value of a $1,000 Investment | |
Assume actual returns for the six months ended April 30, 2020 | |
| | | | | | |
| | Class A | Class C | Class I | Class Y | |
Expense paid per $1,000† | $3.85 | $7.44 | $2.02 | $1.49 | |
Ending value (after expenses) | $933.60 | $929.50 | $934.60 | $935.80 | |
COMPARING YOUR FUND’S EXPENSES
WITH THOSE OF OTHER FUNDS(Unaudited)
Using the SEC’s method to compare expenses
The Securities and Exchange Commission (“SEC”) has established guidelines to help investors assess fund expenses. Per these guidelines, the table below shows your fund’s expenses based on a $1,000 investment, assuming a hypothetical 5% annualized return. You can use this information to compare the ongoing expenses (but not transaction expenses or total cost) of investing in the fund with those of other funds. All mutual fund shareholder reports will provide this information to help you make this comparison. Please note that you cannot use this information to estimate your actual ending account balance and expenses paid during the period.
| | | | | | | |
Expenses and Value of a $1,000 Investment | |
Assuming a hypothetical 5% annualized return for the six months ended April 30, 2020 | |
| | | | | | |
| | Class A | Class C | Class I | Class Y | |
Expense paid per $1,000† | $4.02 | $7.77 | $2.11 | $1.56 | |
Ending value (after expenses) | $1,020.89 | $1,017.16 | $1,022.77 | $1,023.32 | |
† Expenses are equal to the fund’s annualized expense ratio of .80% for Class A, 1.55% for Class C, .42% for Class I and .31% for Class Y, multiplied by the average account value over the period, multiplied by 182/366 (to reflect the one-half year period). |
6
STATEMENT OF INVESTMENTS
April 30, 2020 (Unaudited)
| | | | | | | | |
| |
Description | | | | Shares | | Value ($) | |
Investment Companies - 99.1% | | | | | |
Alternative Investments - 33.5% | | | | | |
AQR Managed Futures Strategy Fund, Cl. I | | | | 2,456,494 | | 21,027,588 | |
ASG Global Alternatives Fund, Cl. Y | | | | 3,884,793 | a | 40,518,388 | |
ASG Managed Futures Strategy Fund, Cl. Y | | | | 1,672,335 | | 16,740,075 | |
DFA Commodity Strategy Portfolio | | | | 2,109,327 | | 9,049,011 | |
Gateway Fund, CI. Y | | | | 1,178,542 | | 38,373,314 | |
| | | | | 125,708,376 | |
Domestic Equity - 29.8% | | | | | |
Boston Partners Long/Short Research Fund, Institutional Class | | | | 4,152,190 | | 54,891,956 | |
Neuberger Berman Long Short Fund, Institutional Class | | | | 3,895,590 | | 56,797,704 | |
| | | | | 111,689,660 | |
Foreign Balanced - 10.8% | | | | | |
BNY Mellon Global Real Return Fund, CI. Y | | | | 2,801,926 | b | 40,655,949 | |
Foreign Equity - 19.4% | | | | | |
361 Global Long/Short Equity Fund, CI. Y | | | | 3,643,847 | a | 37,640,945 | |
BNY Mellon Global Real Estate Securities Fund, CI. Y | | | | 4,849,807 | b | 35,015,607 | |
| | | | | 72,656,552 | |
Foreign Fixed Income - 5.6% | | | | | |
BNY Mellon Dynamic Total Return Fund, CI. Y | | | | 1,360,592 | b | 20,817,053 | |
Total Investments(cost $398,082,259) | | 99.1% | | 371,527,590 | |
Cash and Receivables (Net) | | .9% | | 3,300,839 | |
Net Assets | | 100.0% | | 374,828,429 | |
aInvestment in non-controlled affiliates (cost $83,103,286).
bInvestment in affiliated issuer. The investment objective of this investment company is publicly available and can be found within the investment company’s prospectus.
| | |
Portfolio Summary (Unaudited)† | Value (%) |
Investment Companies | 99.1 |
| | 99.1 |
† Based on net assets.
See notes to financial statements.
7
STATEMENT OF INVESTMENTS IN AFFILIATED ISSUERS(Unaudited)
| | | | | |
Investment Companies | Value
10/31/19 ($) | Purchases ($)† | Sales ($) | Net Realized Gains (Loss) ($) |
BNY Mellon Dynamic Total Return Fund, Cl.Y | 26,833,685 | 851,840 | (4,893,945) | 448,130 |
BNY Mellon Global Real Estate Securities Fund, Cl.Y | 45,426,922 | 5,776,849 | (2,905,664) | 70,950 |
BNY Mellon Global Real Return Fund, Cl.Y | 43,997,135 | 1,047,958 | (1,737,963) | 14,221 |
Total | 116,257,742 | 7,676,647 | (9,537,572) | 533,301 |
| | | | | |
Investment Companies | Net Change in Unrealized Appreciation (Depreciation) ($) | Value
4/30/20 ($) | Net
Assets (%) | Dividends/
Distributions ($) |
BNY Mellon Dynamic Total Return Fund, Cl.Y | (2,422,657) | 20,817,053 | 5.6 | 851,838 |
BNY Mellon Global Real Estate Securities Fund, Cl.Y | (13,353,450) | 35,015,607 | 9.3 | 4,558,199 |
BNY Mellon Global Real Return Fund, Cl.Y | (2,665,402) | 40,655,949 | 10.8 | 1,047,958 |
Total | (18,441,509) | 96,488,609 | 25.7 | 6,457,995 |
† Includes reinvested dividend/distributions.
See notes to financial statements.
In addition, an affiliated company is a company in which the fund has ownership of at least 5% of the voting securities. Investments in affiliated companies during the period ended April 30, 2020 were as follows:
| | | | | |
Investment
Companies | Value at ownership
date($)† | Purchases($) | Sales($) | Net Realized
Gain (Loss)($) |
361 Global Long/Short Equity Fund, Cl. Y | 36,892,204 | - | (698,755) | (77,097) |
ASG Global Alternatives Fund, Cl. Y | 45,012,524 | 748,845 | (1,516,177) | (150,220) |
Total | 81,904,728 | 748,845 | (2,214,932) | (227,317) |
8
| | | | | |
Investment
Companies | Change in Net Unrealized Appreciation
(Depreciation)($) | Value
4/30/20($) | Net
Assets(%) | Dividends/
Distributions($) |
361 Global Long/Short Equity Fund, Cl. Y | 1,524,593 | 37,640,945 | 10.0 | - |
ASG Global Alternatives Fund, Cl. Y | (3,576,584) | 40,518,388 | 10.8 | - |
Total | (2,051,991) | 78,159,333 | 20.8 | - |
† Table reflects values at ownership date of which for security 361 Global Long/Short Equity Fund, Cl. Y is March 31, 2020 and for security ASG Global Alternatives Fund. Cl. Y is December 31, 2019.See notes to financial statements.
9
STATEMENT OF ASSETS AND LIABILITIES
April 30, 2020 (Unaudited)
| | | | | | | |
| | | | | | |
| | | Cost | | Value | |
Assets ($): | | | | |
Investments in securities—See Statement of Investments | | | |
Unaffiliated issuers | 214,670,178 | | 196,879,648 | |
Affiliated issuers | | 183,412,081 | | 174,647,942 | |
Cash | | | | | 3,495,460 | |
Receivable for shares of Common Stock subscribed | | 402,970 | |
Interest receivable | | 23,023 | |
Prepaid expenses | | | | | 47,799 | |
| | | | | 375,496,842 | |
Liabilities ($): | | | | |
Due to BNY Mellon Investment Adviser, Inc. and affiliates—Note 3(c) | | 82,571 | |
Payable for shares of Common Stock redeemed | | 552,465 | |
Directors’ fees and expenses payable | | 3,157 | |
Interest payable—Note 2 | | 526 | |
Other accrued expenses | | | | | 29,694 | |
| | | | | 668,413 | |
Net Assets ($) | | | 374,828,429 | |
Composition of Net Assets ($): | | | | |
Paid-in capital | | | | | 403,463,114 | |
Total distributable earnings (loss) | | | | | (28,634,685) | |
Net Assets ($) | | | 374,828,429 | |
| | | | | | |
Net Asset Value Per Share | Class A | Class C | Class I | Class Y | |
Net Assets ($) | 38,748 | 25,337 | 904,496 | 373,859,848 | |
Shares Outstanding | 3,299 | 2,190 | 77,207 | 31,748,460 | |
Net Asset Value Per Share ($) | 11.75 | 11.57 | 11.72 | 11.78 | |
| | | | | |
See notes to financial statements. | | | | | |
10
STATEMENT OF OPERATIONS
Six Months Ended April 30, 2020 (Unaudited)
| | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Investment Income ($): | | | | |
Income: | | | | |
Cash dividends: | |
Unaffiliated issuers | | | 3,316,710 | |
Affiliated issuers | | | 3,182,152 | |
Interest | | | 19,365 | |
Total Income | | | 6,518,227 | |
Expenses: | | | | |
Management fee—Note 3(a) | | | 508,605 | |
Professional fees | | | 40,542 | |
Registration fees | | | 34,645 | |
Directors’ fees and expenses—Note 3(d) | | | 19,413 | |
Chief Compliance Officer fees—Note 3(c) | | | 6,707 | |
Loan commitment fees—Note 2 | | | 4,037 | |
Prospectus and shareholders’ reports | | | 3,230 | |
Custodian fees—Note 3(c) | | | 2,722 | |
Shareholder servicing costs—Note 3(c) | | | 1,041 | |
Interest expense—Note 2 | | | 526 | |
Distribution fees—Note 3(b) | | | 100 | |
Miscellaneous | | | 7,336 | |
Total Expenses | | | 628,904 | |
Less—reduction in expenses due to undertaking—Note 3(a) | | | (52) | |
Net Expenses | | | 628,852 | |
Investment Income—Net | | | 5,889,375 | |
Realized and Unrealized Gain (Loss) on Investments—Note 4 ($): | | |
Net realized gain (loss) on investments: | | |
Unaffiliated issuers | | | | (746,130) | |
Affiliated issuers | | | | 305,984 | |
Capital gain distributions on unaffiliated issuers | 2,182,108 | |
Capital gain distributions from affiliated issuers | 3,275,843 | |
Net Realized Gain (Loss) | | | 5,017,805 | |
Net change in unrealized appreciation (depreciation) on investments: | | |
Unaffiliated issuers | | | | (17,099,191) | |
Affiliated issuers | | | | (20,493,500) | |
Net Change in Unrealized Appreciation (Depreciation) | | | (37,592,691) | |
Net Realized and Unrealized Gain (Loss) on Investments | | | (32,574,886) | |
Net (Decrease) in Net Assets Resulting from Operations | | (26,685,511) | |
| | | | | | |
See notes to financial statements. | | | | | |
11
STATEMENT OF CHANGES IN NET ASSETS
| | | | | | | | | | |
| | | | | | | | | |
| | | | Six Months Ended
April 30, 2020 (Unaudited) | | Year Ended
October 31, 2019 | |
Operations ($): | | | | | | | | |
Investment income—net | | | 5,889,375 | | | | 4,174,101 | |
Net realized gain (loss) on investments | | 5,017,805 | | | | 4,074,920 | |
Net change in unrealized appreciation
(depreciation) on investments | | (37,592,691) | | | | 16,102,571 | |
Net Increase (Decrease) in Net Assets
Resulting from Operations | (26,685,511) | | | | 24,351,592 | |
Distributions ($): | |
Distributions to shareholders: | | | | | | | | |
Class A | | | (849) | | | | (239) | |
Class C | | | (318) | | | | (242) | |
Class I | | | (34,551) | | | | (18,149) | |
Class Y | | | (10,408,051) | | | | (5,704,719) | |
Total Distributions | | | (10,443,769) | | | | (5,723,349) | |
Capital Stock Transactions ($): | |
Net proceeds from shares sold: | | | | | | | | |
Class A | | | 100 | | | | 1,002 | |
Class C | | | - | | | | 15,123 | |
Class I | | | 1,146,995 | | | | 1,566,135 | |
Class Y | | | 18,777,178 | | | | 75,145,013 | |
Distributions reinvested: | | | | | | | | |
Class A | | | 330 | | | | 89 | |
Class C | | | 27 | | | | 103 | |
Class I | | | 21,045 | | | | 13,626 | |
Class Y | | | 3,235,280 | | | | 1,620,010 | |
Cost of shares redeemed: | | | | | | | | |
Class A | | | - | | | | (20,128) | |
Class C | | | - | | | | (15,906) | |
Class I | | | (1,361,917) | | | | (1,863,423) | |
Class Y | | | (37,414,436) | | | | (115,590,391) | |
Increase (Decrease) in Net Assets
from Capital Stock Transactions | (15,595,398) | | | | (39,128,747) | |
Total Increase (Decrease) in Net Assets | (52,724,678) | | | | (20,500,504) | |
Net Assets ($): | |
Beginning of Period | | | 427,553,107 | | | | 448,053,611 | |
End of Period | | | 374,828,429 | | | | 427,553,107 | |
12
| | | | | | | | | | |
| | | | | | | | | |
| | | | Six Months Ended
April 30, 2020 (Unaudited) | | Year Ended
October 31, 2019 | |
Capital Share Transactions (Shares): | |
Class A | | | | | | | | |
Shares sold | | | 8 | | | | 80 | |
Shares issued for distributions reinvested | | | 25 | | | | 8 | |
Shares redeemed | | | - | | | | (1,668) | |
Net Increase (Decrease) in Shares Outstanding | 33 | | | | (1,580) | |
Class C | | | | | | | | |
Shares sold | | | - | | | | 1,298 | |
Shares issued for distributions reinvested | | | 2 | | | | 9 | |
Shares redeemed | | | - | | | | (1,306) | |
Net Increase (Decrease) in Shares Outstanding | 2 | | | | 1 | |
Class Ia | | | | | | | | |
Shares sold | | | 93,664 | | | | 125,472 | |
Shares issued for distributions reinvested | | | 1,648 | | | | 1,162 | |
Shares redeemed | | | (112,065) | | | | (150,507) | |
Net Increase (Decrease) in Shares Outstanding | (16,753) | | | | (23,873) | |
Class Ya | | | | | | | | |
Shares sold | | | 1,529,728 | | | | 6,110,495 | |
Shares issued for distributions reinvested | | | 252,362 | | | | 137,639 | |
Shares redeemed | | | (3,069,939) | | | | (9,434,107) | |
Net Increase (Decrease) in Shares Outstanding | (1,287,849) | | | | (3,185,973) | |
| | | | | | | | | |
a During the period ended April 30, 2020, 93,190 Class Y shares representing $1,146,995 were exchanged for 93,664 Class I shares and during the period ended October 31, 2019, 115,468 Class Y shares representing $1,452,491 were exchanged for 116,041 Class I shares. | |
See notes to financial statements. | | | | | | | | |
13
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the fiscal periods indicated. All information (except portfolio turnover rate) reflects financial results for a single fund share. Total return shows how much your investment in the fund would have increased (or decreased) during each period, assuming you had reinvested all dividends and distributions. These figures have been derived from the fund’s financial statements.
| | | | | | | |
| | Six Months Ended | |
| | April 30, 2020 | Year Ended October 31, |
Class A Shares | (Unaudited) | 2019 | 2018 | 2017 | 2016 | 2015 |
Per Share Data ($): | | | | | | |
Net asset value, beginning of period | 12.84 | 12.24 | 12.65 | 12.23 | 12.54 | 12.67 |
Investment Operations: | | | | | | |
Investment income (loss)—neta | .15 | .08 | (.03) | .01 | .06 | .07 |
Net realized and unrealized
gain (loss) on investments | (.99) | .60 | (.33) | .42 | (.30) | (.04) |
Total from Investment Operations | (.84) | .68 | (.36) | .43 | (.24) | .03 |
Distributions: | | | | | | |
Dividends from investment income—net | (.13) | (.02) | (.05) | (.01) | (.07) | (.16) |
Dividends from net realized
gain on investments | (.12) | (.06) | – | – | – | (.00)b |
Total Distributions | (.25) | (.08) | (.05) | (.01) | (.07) | (.16) |
Net asset value, end of period | 11.75 | 12.84 | 12.24 | 12.65 | 12.23 | 12.54 |
Total Return (%)c | (6.64)d | 5.57 | (2.89) | 3.52 | (1.88) | .29 |
Ratios/Supplemental Data (%): | | | | | | |
Ratio of total expenses
to average net assetse | .93f | .97 | .86 | .82 | .85 | .86 |
Ratio of net expenses
to average net assetse | .80f | .80 | .80 | .75 | .79 | .80 |
Ratio of net investment income (loss)
to average net assetse | 2.36f | .67 | (.24) | .07 | .48 | .58 |
Portfolio Turnover Rate | 4.62d | 51.61 | 19.18 | 16.45 | 20.39 | 16.73 |
Net Assets, end of period ($ x 1,000) | 39 | 42 | 59 | 61 | 61 | 62 |
a Based on average shares outstanding.
b Amount represents less than $.01 per share.
c Exclusive of sales charge.
d Not annualized.
e Amounts do not include the expenses of the underlying funds.
f Annualized.
See notes to financial statements.
14
| | | | | | | |
| | Six Months Ended | |
| | April 30, 2020 | Year Ended October 31, |
Class C Shares | (Unaudited) | 2019 | 2018 | 2017 | 2016 | 2015 |
Per Share Data ($): | | | | | | |
Net asset value, beginning of period | 12.59 | 12.08 | 12.57 | 12.22 | 12.54 | 12.64 |
Investment Operations: | | | | | | |
Investment income (loss)—neta | .10 | (.03) | (.12) | (.08) | (.02) | (.05) |
Net realized and unrealized
gain (loss) on investments | (.98) | .61 | (.37) | .43 | (.30) | .00b |
Total from Investment Operations | (.88) | .58 | (.49) | .35 | (.32) | (.05) |
Distributions: | | | | | | |
Dividends from investment income—net | (.02) | (.01) | – | – | – | (.05) |
Dividends from net realized
gain on investments | (.12) | (.06) | – | – | – | (.00)b |
Total Distributions | (.14) | (.07) | – | – | – | (.05) |
Net asset value, end of period | 11.57 | 12.59 | 12.08 | 12.57 | 12.22 | 12.54 |
Total Return (%)c | (7.05)d | 4.85 | (3.90) | 2.86 | (2.55) | (.37) |
Ratios/Supplemental Data (%): | | | | | | |
Ratio of total expenses
to average net assetse | 1.74f | 1.69 | 1.59 | 1.41 | 1.44 | 1.59 |
Ratio of net expenses
to average net assetse | 1.55f | 1.55 | 1.55 | 1.41 | 1.44 | 1.50 |
Ratio of net investment income (loss)
to average net assetse | 1.62f | (.21) | (.99) | (.63) | (.16) | (.36) |
Portfolio Turnover Rate | 4.62d | 51.61 | 19.18 | 16.45 | 20.39 | 16.73 |
Net Assets, end of period ($ x 1,000) | 25 | 28 | 26 | 27 | 33 | 34 |
a Based on average shares outstanding.
b Amount represents less than $.01 per share.
c Exclusive of sales charge.
d Not annualized.
e Amounts do not include the expenses of the underlying funds.
f Annualized.
See notes to financial statements.
15
FINANCIAL HIGHLIGHTS (continued)
| | | | | | | |
| | Six Months Ended | |
| | April 30, 2020 | Year Ended October 31, |
Class I Shares | (Unaudited) | 2019 | 2018 | 2017 | 2016 | 2015 |
Per Share Data ($): | | | | | | |
Net asset value, beginning of period | 12.84 | 12.27 | 12.69 | 12.27 | 12.58 | 12.70 |
Investment Operations: | | | | | | |
Investment income—neta | .19 | .14 | .01 | .05 | .10 | .03 |
Net realized and unrealized
gain (loss) on investments | (1.01) | .59 | (.34) | .43 | (.28) | .02 |
Total from Investment Operations | (.82) | .73 | (.33) | .48 | (.18) | .05 |
Distributions: | | | | | | |
Dividends from investment income—net | (.18) | (.10) | (.09) | (.06) | (.13) | (.17) |
Dividends from net realized
gain on investments | (.12) | (.06) | – | – | – | (.00)b |
Total Distributions | (.30) | (.16) | (.09) | (.06) | (.13) | (.17) |
Net asset value, end of period | 11.72 | 12.84 | 12.27 | 12.69 | 12.27 | 12.58 |
Total Return (%) | (6.54)c | 6.05 | (2.60) | 3.97 | (1.44) | .45 |
Ratios/Supplemental Data (%): | | | | | | |
Ratio of total expenses
to average net assetsd | .42e | .42 | .38 | .35 | .37 | .43 |
Ratio of net expenses
to average net assetsd | .42e | .42 | .38 | .35 | .37 | .41 |
Ratio of net investment income
to average net assetsd | 2.94e | 1.11 | .08 | .43 | .79 | .23 |
Portfolio Turnover Rate | 4.62c | 51.61 | 19.18 | 16.45 | 20.39 | 16.73 |
Net Assets, end of period ($ x 1,000) | 904 | 1,206 | 1,446 | 1,780 | 1,336 | 633 |
a Based on average shares outstanding.
b Amount represents less than $.01 per share.
c Not annualized.
d Amounts do not include the expenses of the underlying funds.
e Annualized.
See notes to financial statements.
16
| | | | | | | |
Six Months Ended | |
April 30, 2020 | Year Ended October 31, |
Class Y Shares | (Unaudited) | 2019 | 2018 | 2017 | 2016 | 2015 |
Per Share Data ($): | | | | | | |
Net asset value, beginning of period | 12.90 | 12.33 | 12.74 | 12.32 | 12.63 | 12.71 |
Investment Operations: | | | | | | |
Investment income—neta | .18 | .12 | .03 | .06 | .11 | .13 |
Net realized and unrealized
gain (loss) on investments | (.99) | .62 | (.34) | .43 | (.28) | (.03) |
Total from Investment Operations | (.81) | .74 | (.31) | .49 | (.17) | .10 |
Distributions: | | | | | | |
Dividends from
investment income—net | (.19) | (.11) | (.10) | (.07) | (.14) | (.18) |
Dividends from net realized
gain on investments | (.12) | (.06) | – | – | – | (.00)b |
Total Distributions | (.31) | (17) | (.10) | (.07) | (.14) | (.18) |
Net asset value, end of period | 11.78 | 12.90 | 12.33 | 12.74 | 12.32 | 12.63 |
Total Return (%) | (6.42)c | 6.11 | (2.43) | 4.01 | (1.39) | .82 |
Ratios/Supplemental Data (%): | | | | | | |
Ratio of total expenses
to average net assetsd | .31e | .30 | .30 | .29 | .30 | .31 |
Ratio of net expenses
to average net assetsd | .31e | .30 | .30 | .29 | .30 | .31 |
Ratio of net investment income
to average net assetsd | 2.89e | .98 | .27 | .52 | .92 | .99 |
Portfolio Turnover Rate | 4.62c | 51.61 | 19.18 | 16.45 | 20.39 | 16.73 |
Net Assets, end of period ($ x 1,000) | 373,860 | 426,278 | 446,522 | 475,659 | 509,333 | 477,866 |
a Based on average shares outstanding.
b Amount represents less than $.01 per share.
c Not annualized.
d Amounts do not include the expenses of the underlying funds.
e Annualized.
See notes to financial statements.
17
NOTES TO FINANCIAL STATEMENTS(Unaudited)
NOTE 1—Significant Accounting Policies:
BNY Mellon Alternative Diversifier Strategies Fund (the “fund”) is a separate diversified series of of BNY Mellon Investment Funds II, Inc. (the “Company”), which is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company and operates as a series company currently offering three series, including the fund. The fund’s investment objective is to seek long-term capital appreciation. BNY Mellon Investment Adviser, Inc. (the “Adviser”), a wholly-owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser.
The Company’s Board of Directors (the “Board”) approved, effective December 31, 2019 (the “Effective Date”), the termination of the fund’s authorized Class T shares. Prior to the Effective Date, the fund did not offer such Class T shares for purchase. The authorized Class T shares were reallocated to authorized Class Y shares, increasing authorized Class Y shares from 100 million to 200 million.
BNY Mellon Securities Corporation (the “Distributor”), a wholly-owned subsidiary of the Adviser, is the distributor of the fund’s shares. The fund is authorized to issue 500 shares of $.001 par value Common Stock. The fund currently has authorized four classes of shares: Class A (100 million shares authorized), Class C (100 million shares authorized), Class I (100 million shares authorized) and Class Y (200 million shares authorized). Class A and Class C shares are sold primarily to retail investors through financial intermediaries and bear Distribution and/or Shareholder Services Plan fees. Class A shares generally are subject to a sales charge imposed at the time of purchase. Class C shares are subject to a contingent deferred sales charge (“CDSC”) imposed on Class C shares redeemed within one year of purchase. Class C shares automatically convert to Class A shares ten years after the date of purchase, without the imposition of a sales charge. Class I shares are sold primarily to bank trust departments and other financial service providers (including The Bank of New York Mellon, a subsidiary of BNY Mellon and an affiliate of the Adviser, and its affiliates), acting on behalf of customers having a qualified trust or an investment account or relationship at such institution, and bear no Distribution or Shareholder Services Plan fees. Class Y shares are sold at net asset value per share generally to institutional investors, and bear no Distribution or Shareholder Services Plan fees. Class I and Class Y shares are offered without a front-end sales charge or CDSC. Other differences between the classes include the services offered to and the expenses borne
18
by each class, the allocation of certain transfer agency costs, and certain voting rights. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains or losses on investments are allocated to each class of shares based on its relative net assets.
As of April 30, 2020, MBC Investments Corp., an indirect subsidiary of BNY Mellon, held 2,000 Class A and 2,000 Class C shares of the fund.
The Company accounts separately for the assets, liabilities and operations of each series. Expenses directly attributable to each series are charged to that series’ operations; expenses which are applicable to all series are allocated among them on a pro rata basis.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the exclusive reference of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP for SEC registrants. The fund is an investment company and applies the accounting and reporting guidance of the FASB ASC Topic 946 Financial Services-Investment Companies. The fund’s financial statements are prepared in accordance with GAAP, which may require the use of management estimates and assumptions. Actual results could differ from those estimates.
The Companyenters into contracts that contain a variety of indemnifications. The fund’s maximum exposure under these arrangements is unknown. The fund does not anticipate recognizing any loss related to these arrangements.
(a) Portfolio valuation: The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. This hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
Additionally, GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced disclosures around valuation inputs and techniques used during annual and interim periods.
19
NOTES TO FINANCIAL STATEMENTS (Unaudited)(continued)
Various inputs are used in determining the value of the fund’s investments relating to fair value measurements. These inputs are summarized in the three broad levels listed below:
Level 1—unadjusted quoted prices in active markets for identical investments.
Level 2—other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).
Level 3—significant unobservable inputs (including the fund’s own assumptions in determining the fair value of investments).
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Investments are valued at the net asset value of each underlying fund determined as of the close of the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date and are generally categorized within Level 1 of the fair value hierarchy.
The following is a summary of the inputs used as of April 30, 2020in valuing the fund’s investments:
| | | | | |
| | Level 1 - Unadjusted Quoted Prices | Level 2 - Other Significant Observable Inputs | Level 3 -Significant Unobservable Inputs | Total |
Assets ($) | | | |
Investments in Securities:† | | | |
Investment Companies | 371,527,590 | - | - | 371,527,590 |
† See Statement of Investments for additional detailed categorizations, if any.
(b)Securities transactions and investment income: Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the identified cost basis. Dividend income is recognized on the ex-dividend date and interest income, including, where applicable, accretion of discount and amortization of premium on investments, is recognized on the accrual basis.
(c) Affiliated issuers: Investments in other investment companies advised by the Adviser are considered “affiliated” under the Act.
(d) Risk: Certain events particular to the industries in which the fund’s investments conduct their operations, as well as general economic, political and public health conditions, may have a significant negative impact on the
20
investee’s operations and profitability. In addition, turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income markets may negatively affect many issuers, which could adversely affect the fund. Global economies and financial markets are becoming increasingly interconnected, and conditions and events in one country, region or financial market may adversely impact issuers in a different country, region or financial market. These risks may be magnified if certain events or developments adversely interrupt the global supply chain; in these and other circumstances, such risks might affect companies world-wide. Recent examples include pandemic risks related to COVID-19 and aggressive measures taken world-wide in response by governments, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines of large populations, and by businesses, including changes to operations and reducing staff. To the extent the fund may overweight its investments in certain countries, companies, industries or market sectors, such positions will increase the fund’s exposure to risk of loss from adverse developments affecting those countries, companies, industries or sectors.
(e) Dividends and distributions to shareholders: Dividends and distributions are recorded on the ex-dividend date. Dividends from investment income-net and dividends from net realized capital gains, if any, are normally declared and paid annually, but the fund may make distributions on a more frequent basis to comply with the distribution requirements of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent that net realized capital gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP.
(f) Federal income taxes: It is the policy of the fund to continue to qualify as a regulated investment company, if such qualification is in the best interests of its shareholders, by complying with the applicable provisions of the Code, and to make distributions of taxable income and net realized capital gain sufficient to relieve it from substantially all federal income and excise taxes.
As of and during the period ended April 30, 2020, the fund did not have any liabilities for any uncertain tax positions. The fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the Statement of Operations. During the period ended April 30, 2020, the fund did not incur any interest or penalties.
21
NOTES TO FINANCIAL STATEMENTS (Unaudited)(continued)
Each tax year in the three-year period ended October 31, 2019 remains subject to examination by the Internal Revenue Service and state taxing authorities.
The tax character of distributions paid to shareholders during the fiscal year ended October 31, 2019 was as follows: ordinary income $3,702,941 and long-term capital gains $2,020,408. The tax character of current year distributions will be determined at the end of the current fiscal year.
NOTE 2—Bank Lines of Credit:
The fund participates with other long-term open-end funds managed by the Adviser in a $927 million unsecured credit facility led by Citibank, N.A. (the “Citibank Credit Facility”) and a $300 million unsecured credit facility provided by The Bank of New York Mellon (the “BNYM Credit Facility”), each to be utilized primarily for temporary or emergency purposes, including the financing of redemptions (each, a “Facility”). The Citibank Credit Facility is available in two tranches: (i) Tranche A is in an amount equal to $747 million and is available to all long-term open-ended funds, including the fund, and (ii) Tranche B is an amount equal to $180 million and is available only to BNY Mellon Floating Rate Income Fund, a series of BNY Mellon Investment Funds IV, Inc. Prior to March 11, 2020, the Citibank Credit Facility was $1.030 billion with Tranche A available in an amount equal to $830 million and Tranche B available in an amount equal to $200 million. In connection therewith, the fund has agreed to pay its pro rata portion of commitment fees for Tranche A of the Citibank Credit Facility and the BNYM Credit Facility. Interest is charged to the fund based on rates determined pursuant to the terms of the respective Facility at the time of borrowing.
The average amount of borrowings outstanding under the Facilities during the period ended April 30, 2020 was approximately $56,044 with a related weighted average annualized interest rate of 1.89%.
NOTE 3—Management Fee and Other Transactions with Affiliates:
(a)Pursuant to a management agreement with the Adviser, the fund has agreed to pay a management fee at the annual rate of 1.35% applied to the portion of the fund’s average daily net assets allocated to direct investments in securities and .25% applied to that portion of the fund’s average daily net assets allocated to investments in other investment companies (underlying funds) and money market instruments (including cash and equivalents). The Adviser has contractually agreed, from November 1, 2019 through February 28, 2021, to waive receipt of its fees and/or assume the direct expenses of the fund, so that the direct expenses
22
of none of the classes (excluding Rule 12b-1 Distribution Plan fees, Shareholder Services Plan fees, acquired fund fees and expenses incurred by underlying funds, taxes, interest expense, brokerage commissions, commitment fees on borrowings and extraordinary expenses) exceed .55% of the value of the fund’s average daily net assets. On or after February 28, 2021, the Adviser may terminate this expense limitation at any time. Because “acquired fund fees and expenses” are incurred indirectly by the fund, such fees and expenses are not included in the expense limitations. The reduction in expenses, pursuant to the undertaking, amounted to $52 during the period ended April 30, 2020.
(b) Under the Distribution Plan adopted pursuant to Rule 12b-1 under the Act, Class C shares pay the Distributor for distributing its shares at an annual rate of .75% of the value of its average daily net assets. During the period ended April 30, 2020, Class C shares were charged $100 pursuant to the Distribution Plan.
(c)Under the Shareholder Services Plan, Class A and Class C shares pay the Distributor at an annual rate of .25% of the value of their average daily net assets for the provision of certain services. The services provided may include personal services relating to shareholder accounts, such as answering shareholder inquiries regarding the fund and providing reports and other information, and services related to the maintenance of shareholder accounts. The Distributor may make payments to Service Agents (securities dealers, financial institutions or other industry professionals) with respect to these services. The Distributor determines the amounts to be paid to Service Agents. During the period ended April 30, 2020, Class A and Class C shares were charged $51and $33, respectively, pursuant to the Shareholder Services Plan.
Under its terms, the Distribution Plan and Shareholder Services Plan shall remain in effect from year to year, provided such continuance is approved annually by a vote of a majority of those Directors who are not “interested persons” of the Company and who have no direct or indirect financial interest in the operation of or in any agreement related to the Distribution Plan or Shareholder Services Plan.
The fund has an arrangement with the transfer agent whereby the fund may receive earnings credits when positive cash balances are maintained, which are used to offset transfer agency fees For financial reporting purposes, the fund includes net earnings credits, if any, as an expense offset in the Statement of Operations.
The fund has an arrangement with the custodian whereby the fund will receive interest income or be charged an overdraft fees when cash balances
23
NOTES TO FINANCIAL STATEMENTS (Unaudited)(continued)
are maintained. For financial reporting purposes, the fund includes this interest income and overdraft fees, if any, as interest income in the Statements of Operations.
The fund compensates BNY Mellon Transfer, Inc., a wholly-owned subsidiary of the Adviser, under a transfer agency agreement for providing transfer agency and cash management services for the fund. The majority of transfer agency fees are comprised of amounts paid on a per account basis, while cash management fees are related to fund subscriptions and redemptions. During the period ended April 30, 2020, the fund was charged $789 for transfer agency services. These fees are included in Shareholder servicing costs in the Statement of Operations.
The fund compensates The Bank of New York Mellon under a custody agreement for providing custodial services for the fund. These fees are determined based on net assets, geographic region and transaction activity. During the period ended April 30, 2020, the fund was charged $2,722 pursuant to the custody agreement.
During the period ended April 30, 2020, the fund was charged $6,707 for services performed by the Chief Compliance Officer and his staff. These fees are included in Chief Compliance Officer fees in the Statement of Operations.
The components of “Due to BNY Mellon Investment Adviser, Inc. and affiliates” in the Statement of Assets and Liabilities consist of: management fees of $76,089, Distribution Plan fees of $15, Shareholder Services Plan fees of $13, custodian fees of $1,750, Chief Compliance Officer fees of $4,438 and transfer agency fees of $272, which are offset against an expense reimbursement currently in effect in the amount of $6.
(d) Each Board member also serves as a Board member of other funds in the BNY Mellon Family of Funds complex. Annual retainer fees and attendance fees are allocated to each fund based on net assets.
NOTE 4—Securities Transactions:
The aggregate amount of purchases and sales of investment securities, excluding short-term securities, during the period ended April 30, 2020, amounted to $18,620,883 and $32,657,373, respectively.
At April 30, 2020, accumulated net unrealized depreciation on investments was $26,554,669, consisting of $1,782,285 gross unrealized appreciation and $28,336,954 gross unrealized depreciation.
24
At April 30, 2020, the cost of investments for federal income tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement of Investments).
25
INFORMATION ABOUT THE RENEWAL OF THE FUND'S MANAGEMENT AGREEMENT (Unaudited)
At a meeting of the fund’s Board of Directors held on February 26-27, 2020, the Board considered the renewalof the fund’s Management Agreement pursuant to which the Adviser provides the fund with investment advisory and administrative services (the “Agreement”). The Board members, none of whom are “interested persons” (as defined in the Investment Company Act of 1940, as amended) of the fund, were assisted in their review by independent legal counsel and met with counsel in executive session separate from representatives of the Adviser. In considering the renewal of the Agreement, the Board considered several factors that it believed to be relevant, including those discussed below. The Board did not identify any one factor as dispositive, and each Board member may have attributed different weights to the factors considered.
Analysis of Nature, Extent, and Quality of Services Provided to the Fund. The Board considered information provided to it at the meeting and in previous presentations from representatives of the Adviser regarding the nature, extent, and quality of the services provided to funds in the BNY Mellon fund complex, including the fund. The Adviser provided the number of open accounts in the fund, the fund’s asset size and the allocation of fund assets among distribution channels. The Adviser also had previously provided information regarding the diverse intermediary relationships and distribution channels of funds in the BNY Mellon fund complex (such as retail direct or intermediary, in which intermediaries typically are paid by the fund and/or the Adviser) and the Adviser’s corresponding need for broad, deep, and diverse resources to be able to provide ongoing shareholder services to each intermediary or distribution channel, as applicable to the fund.
The Board also considered research support available to, and portfolio management capabilities of, the fund’s portfolio management personnel and that the Adviser also provides oversight of day-to-day fund operations, including fund accounting and administration and assistance in meeting legal and regulatory requirements. The Board also considered the Adviser’s extensive administrative, accounting and compliance infrastructures.
Comparative Analysis of the Fund’s Performance and Management Fee and Expense Ratio. The Board reviewed reports prepared by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider of investment company data, which included information comparing (1) the fund’s performance with the performance of a group of institutional actively managed alternative multi-strategy funds of funds (the “Performance Group”) and with a broader group of all retail and institutional alternative multi-strategy funds (the “Performance Universe”), all for various periods ended December 31, 2019, and (2) the fund’s actual and contractual management fees and total expenses with those of the same group of funds in the Performance Group (the “Expense Group”) and with a broader group of all institutional actively managed alternative multi-strategy funds of funds, excluding outliers (the “Expense Universe”), the information for which was derived in part from fund financial statements available to Broadridge as of the date of its analysis. The Adviser previously had furnished the
26
Board with a description of the methodology Broadridge used to select the Performance Group and Performance Universe and the Expense Group and Expense Universe.
Representatives of the Adviser stated that the usefulness of performance comparisons may be affected by a number of factors, including different investment limitations and policies that may be applicable to the fund and comparison funds. The Board discussed with representatives of the Adviser the results of the comparisons and considered that the fund’s total return performance was below the Performance Group median for all periods except the one- and three-year periods when it was above the median and the fund’s total return performance was above the Performance Universe median for all periods except the four-year period when it was below the median. The Board considered the relative proximity of the fund’s performance to the Performance Group and/or Performance Universe median in certain periods when performance was below median. It was noted that there were only five or fewer other funds in the Performance Group during each period. The Adviser also provided a comparison of the fund’s calendar year total returns to the returns of the fund’s benchmark index, and it was noted that the fund’s returns were above the returns of the index in three of the five calendar years shown.
The Board reviewed and considered the contractual management fee rate payable by the fund to the Adviser in light of the nature, extent and quality of the management services provided by the Adviser. In addition, the Board reviewed and considered the actual management fee rate paid by the fund over the fund’s last fiscal year. The Board noted that the fund bears indirectly its pro rata share of the expenses of the underlying funds in which it invests, including management fees payable by such underlying funds to the Adviser or its affiliates. The Board also reviewed the range of actual and contractual management fees and total expenses as a percentage of average net assets of the Expense Group and Expense Universe funds and discussed the results of the comparisons. The Board considered that the fund’s contractual management fee was lower than the Expense Group median contractual management fee, and that the fund’s actual management fee was lower than the Expense Group median and higher than the Expense Universe median actual management fee. This information also showed that the fund’s total expense ratio, before including underlying fund expenses, was lower than the median of the total expense ratios of the funds in the Expense Group, but was higher than the Expense Group median and slightly higher than the Expense Universe median total expenses after including underlying fund expenses.
Representatives of the Adviser stated that the Adviser has contractually agreed, until February 28, 2021, to waive receipt of its fees and/or assume the direct expenses of the fund so that the direct expenses of none of its classes (excluding Rule 12b-1 fees, shareholder services fees, taxes, interest, brokerage commissions, commitment fees on borrowings and extraordinary expenses) exceed .55% of the fund’s average daily net assets.
Representatives of the Adviser reviewed with the Board the management or investment advisory fees paid by funds advised or administered by the Adviser that are in the same Lipper category as the fund (the “Similar Clients”), and explained the nature of the
27
INFORMATION ABOUT THE RENEWAL OF THE FUND'S MANAGEMENT AGREEMENT (Unaudited) (continued)
Similar Clients. They discussed differences in fees paid and the relationship of the fees paid in light of any differences in the services provided and other relevant factors. The Board considered the relevance of the fee information provided for the Similar Clients to evaluate the appropriateness of the fund’s management fee. Representatives of the Adviser noted that there were no separate accounts and/or other types of client portfolios advised by the Adviser that are considered to have similar investment strategies and policies as the fund.
Analysis of Profitability and Economies of Scale. Representatives of the Adviser reviewed the expenses allocated and profit received by the Adviser and its affiliates and the resulting profitability percentage for managing the fund and the aggregate profitability percentage to the Adviser and its affiliates for managing the funds in the BNY Mellon fund complex, and the method used to determine the expenses and profit. The Board concluded that the profitability results were not excessive, given the services rendered and service levels provided by the Adviser and its affiliates. The Board also had been provided with information prepared by an independent consulting firm regarding the Adviser’s approach to allocating costs to, and determining the profitability of, individual funds and the entire BNY Mellon fund complex. The consulting firm also had analyzed where any economies of scale might emerge in connection with the management of a fund.
The Board considered, on the advice of its counsel, the profitability analysis (1) as part of its evaluation of whether the fees under the Agreement, considered in relation to the mix of services provided by the Adviser, including the nature, extent and quality of such services, supported the renewal of the Agreement and (2) in light of the relevant circumstances for the fund and the extent to which economies of scale would be realized if the fund grows and whether fee levels reflect these economies of scale for the benefit of fund shareholders. Representatives of the Adviser also stated that, as a result of shared and allocated costs among funds in the BNY Mellon fund complex, the extent of economies of scale could depend substantially on the level of assets in the complex as a whole, so that increases and decreases in complex-wide assets can affect potential economies of scale in a manner that is disproportionate to, or even in the opposite direction from, changes in the fund’s asset level. The Board also considered potential benefits to the Adviser from acting as investment adviser and took into consideration that there were no soft dollar arrangements in effect for trading the fund’s investments.
At the conclusion of these discussions, the Board agreed that it had been furnished with sufficient information to make an informed business decision with respect to the renewal of the Agreement. Based on the discussions and considerations as described above, the Board concluded and determined as follows.
· The Board concluded that the nature, extent and quality of the services provided by the Adviser are adequate and appropriate.
· The Board generally was satisfied with the fund’s overall performance..
28
· The Board concluded that the fee paid to the Adviser continued to be appropriate under the circumstances and in light of the factors and the totality of the services provided as discussed above.
· The Board determined that the fee charged by the Adviser under the Agreement was for services in addition to, and not duplicative of, services provided under the advisory contracts of the underlying funds in which the fund invested.
· The Board determined that the economies of scale which may accrue to the Adviser and its affiliates in connection with the management of the fund had been adequately considered by the Adviser in connection with the fee rate charged to the fund pursuant to the Agreement and that, to the extent in the future it were determined that material economies of scale had not been shared with the fund, the Board would seek to have those economies of scale shared with the fund.
In evaluating the Agreement, the Board considered these conclusions and determinations and also relied on its previous knowledge, gained through meetings and other interactions with the Adviser and its affiliates, of the Adviser and the services provided to the fund by the Adviser. The Board also relied on information received on a routine and regular basis throughout the year relating to the operations of the fund and the investment management and other services provided under the Agreement, including information on the investment performance of the fund in comparison to similar mutual funds and benchmark performance indices; general market outlook as applicable to the fund; and compliance reports. In addition, the Board’s consideration of the contractual fee arrangements for the fund had the benefit of a number of years of reviews of the Agreement for the fund, or substantially similar agreements for other BNY Mellon funds that the Board oversees, during which lengthy discussions took place between the Board and representatives of the Adviser. Certain aspects of the arrangements may receive greater scrutiny in some years than in others, and the Board’s conclusions may be based, in part, on their consideration of the fund’s arrangements, or substantially similar arrangements for other BNY Mellon funds that the Board oversees, in prior years. The Board determined to renew the Agreement.
29
LIQUIDITY RISK MANAGEMENT PROGRAM (Unaudited)
Effective June 1, 2019, the fund adopted a liquidity risk management program (the “Liquidity Risk Management Program”) pursuant to the requirements of Rule 22e-4 under the Investment Company Act of 1940, as amended. Rule 22e-4 requires registered open-end funds, including mutual funds and exchange-traded funds but not money market funds, to establish liquidity risk management programs in order to effectively manage fund liquidity and shareholder redemptions. The rule is designed to mitigate the risk that a fund could not meet redemption requests without significantly diluting the interests of remaining investors.
The rule requires the funds to assess, manage and review their liquidity risk at least annually considering applicable factors such as investment strategy and liquidity during normal and foreseeable stressed conditions, including whether the strategy is appropriate for an open-end fund and whether the fund has a relatively concentrated portfolio or large positions in particular issuers. The fund must also assess its use of borrowings and derivatives, short-term and long-term cash flow projections in normal and stressed conditions, holdings of cash and cash equivalents, and borrowing arrangements and other funding sources.
The rule also requires the fund to classify its investments as highly liquid, moderately liquid, less liquid or illiquid based on the number of days the fund expects it would take to liquidate the investment, and to review these classifications at least monthly or more often under certain conditions. The periods range from three or fewer business days for a highly liquid investment to greater than seven calendar days for settlement of a less liquid investment. Illiquid investments are those a fund does not expect to be able to sell or dispose of within seven calendar days without significantly changing the market value. The fund is prohibited from acquiring an investment if, after the acquisition, its holdings of illiquid assets will exceed 15% of its net assets. In addition, if a fund permits redemptions in-kind, the rule requires the fund to establish redemption in-kind policies and procedures governing how and when it will engage in such redemptions.
Pursuant to the rule’s requirements, the Liquidity Risk Management Program has been reviewed and approved by the fund’s board. Furthermore, the board has received a written report prepared by the Program’s Administrator that addresses the operation of the Program, assesses its adequacy and effectiveness and describes any material changes made to the Program.
Assessment of Program
In the opinion of the Program Administrator, the Program approved by the fund board continues to be adequate for the fund and the Program has been implemented effectively. The Program Administrator has monitored the fund’s liquidity risk and the liquidity classification of the securities held by the fund and has determined that the Program is operating effectively.
During the period from June 1, 2019 to March 31, 2020, there were no material changes to the Program and no material liquidity events that impacted the fund. During the period, the fund held sufficient highly liquid assets to meet fund redemptions.
30
Under normal expected foreseeable fund redemption forecasts and foreseeable stressed fund redemption forecasts, the Program Administrator believes that the fund maintains sufficient highly liquid assets to meet expected fund redemptions.
31
NOTES
32
NOTES
33
BNY Mellon Alternative Diversifier Strategies Fund
240 Greenwich Street
New York, NY 10286
Adviser
BNY Mellon Investment Adviser, Inc.
240 Greenwich Street
New York, NY 10286
Custodian
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
Transfer Agent &
Dividend Disbursing Agent
BNY Mellon Transfer, Inc.
240 Greenwich Street
New York, NY 10286
Distributor
BNY Mellon Securities Corporation
240 Greenwich StreetNew York, NY 10286
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Ticker Symbols: | Class A: DRNAX Class C: DRNCX Class I: DRNIX Class Y: DRYNX |
Telephone Call your financial representative or 1-800-373-9387
Mail The BNY Mellon Family of Funds, 144 Glenn Curtiss Boulevard, Uniondale, NY 11556-0144
E-mailSend your request toinfo@bnymellon.com
InternetInformation can be viewed online or downloaded atwww.bnymellonim.com/us
The fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-PORT. The fund’s Forms N-PORT are available on the SEC’s website atwww.sec.gov.
A description of the policies and procedures that the fund uses to determine how to vote proxies relating to portfolio securities and information regarding how the fund voted these proxies for the most recent 12-month period ended June 30 is available atwww.bnymellonim.com/us and on the SEC’s website at www.sec.gov and without charge, upon request, by calling 1-800-373-9387.
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© 2020 BNY Mellon Securities Corporation
6253SA0420 | 
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