UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number | 811-04215 | |||||
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| BNY Mellon U.S. Mortgage Fund, Inc. |
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| (Exact name of Registrant as specified in charter) |
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c/o BNY Mellon Investment Adviser, Inc. 240 Greenwich Street New York, New York 10286 |
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| (Address of principal executive offices) (Zip code) |
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| Bennett A. MacDougall, Esq. 240 Greenwich Street New York, New York 10286 |
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| (Name and address of agent for service) |
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Registrant's telephone number, including area code: | (212) 922-6400 | |||||
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Date of fiscal year end:
| 04/30 |
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Date of reporting period: | 10/31/2020
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FORM N-CSR
Item 1. Reports to Stockholders.
BNY Mellon U.S. Mortgage Fund, Inc.
SEMIANNUAL REPORT October 31, 2020 |
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The views expressed in this report reflect those of the portfolio manager(s) only through the end of the period covered and do not necessarily represent the views of BNY Mellon Investment Adviser, Inc. or any other person in the BNY Mellon Investment Adviser, Inc. organization. Any such views are subject to change at any time based upon market or other conditions and BNY Mellon Investment Adviser, Inc. disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a fund in the BNY Mellon Family of Funds are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any fund in the BNY Mellon Family of Funds. |
Not FDIC-Insured • Not Bank-Guaranteed • May Lose Value |
Contents
THE FUND
BNY Mellon Investment Adviser, Inc. | |
With Those of Other Funds | |
in Affiliated Issuers | |
the Fund’s Management and | |
Sub-Investment Advisory Agreements | |
FOR MORE INFORMATION
Back Cover
| The Fund |
A LETTER FROM THE PRESIDENT OF BNY MELLON INVESTMENT ADVISER, INC.
Dear Shareholder:
We are pleased to present this semiannual report for BNY Mellon U.S. Mortgage Fund, Inc., covering the six-month period from May 1, 2020 through October 31, 2020. For information about how the fund performed during the reporting period, as well as general market perspectives, we provide a Discussion of Fund Performance on the pages that follow.
Equities rallied for much of the period, fueled by continued accommodative rate policies by the U.S. Federal Reserve (the “Fed”), as well as emergency stimulus measures enacted by global central banks and governments in response to the COVID-19 pandemic and resulting economic lockdown. Stocks trended upward through the early fall. Volatility reentered the picture in September 2020 and continued through October as concerns over rising COVID-19 infection rates, continued trade tensions, the U.S. Congress’ failure to pass additional financial assistance and anxiety over the upcoming U.S. election constrained equity valuations.
Fixed-income market prices were also heavily influenced by emergency actions taken by the Fed prior to the start of the period. Severe rate cuts and a financial support package, combined with a resurgence of economic activity and the Fed’s commitment to a “lower-for-longer” rate policy, helped risk-asset prices to rise throughout the first several months of the period. Bond indices generally rose until September 2020, when investment-grade instrument prices stalled. Yields in the intermediate and long portions of the Treasury curve rose during October, further constraining prices.
We believe the near-term outlook for the U.S. will be challenging, as the country continues to battle COVID-19. As always, we will monitor relevant data for meaningful developments. We encourage you to discuss the risks and opportunities in today’s investment environment with your financial advisor.
Thank you for your continued confidence and support.
Sincerely,
Renee LaRoche-Morris
President
BNY Mellon Investment Adviser, Inc.
November 16, 2020
2
DISCUSSION OF FUND PERFORMANCE (Unaudited)
For the period from May 1, 2020 through October 31, 2020, as provided by portfolio managers Eric Seasholtz and Karen Gemmett, CFA, of Amherst Capital Management LLC, Sub-Investment Adviser
Market and Fund Performance Overview
For the six-month period ended October 31, 2020, the BNY Mellon U.S. Mortgage Fund, Inc.’s Class A shares produced a total return of 0.66%, Class C shares returned 0.29%, Class I shares returned 0.83%, Class Y shares returned 0.82% and Class Z shares returned 0.77%.1 In comparison, the fund’s benchmark, the Bloomberg Barclays GNMA Index (the “Index”), achieved a total return of -0.33% for the same period.2
Mortgage-backed securities produced mildly negative returns over the reporting period, amid rising interest rates, high refinancing risk and high buyout rates. The fund outperformed the Index, due in part to successful coupon selection within agency mortgage-backed securities (MBS), investments in non-government-guaranteed securities and positions in securities outside of the Index, which outperformed the Index.
The Fund’s Investment Approach
The fund seeks to maximize total return, consisting of capital appreciation and current income. To pursue its goal, the fund normally invests at least 80% of its net assets in U.S. mortgage-related securities. These mortgage-related securities may include certificates issued and guaranteed as to timely payment of principal and interest by the Government National Mortgage Association (GNMA or “Ginnie Mae”); securities issued by government-related organizations such as Fannie Mae and Freddie Mac; residential and commercial mortgage-backed securities issued by governmental agencies or private entities; and collateralized mortgage obligations (CMOs). The fund will invest at least 65% of its net assets in Ginnie Maes. The fund can invest in privately issued, mortgage-backed securities with a BBB or higher credit quality, but currently intends to invest in only those securities with an A or higher credit quality.
A Rebound from Volatility Guides Market Returns
Prior to the start of the reporting period, capital markets saw a massive flight to quality and significant widening among all spread sectors. The environment over the six-month reporting period was a story of recovery from that volatility. During the period, rates were still historically low, but they rose during the period, coming off of incredibly low rates seen during the pre-period flight to quality. The Treasury yield curve steepened during the period. The U.S. Federal Reserve (the “Fed”) bought corporate bonds and mortgage-backed securities to help provide liquidity and support asset valuations. As the election approached, expectations for additional stimulus increased, as it looked as though Democrats may win. This expectation was priced into the market and contributed to rising interest rates in October 2020.
GNMA securities underperformed despite Fed purchases. Their return relative to like-duration Treasuries was negative. A large constraining factor was high refinancing risk,
3
DISCUSSION OF FUND PERFORMANCE (Unaudited) (continued)
felt most strongly by securities with coupons of 3% and higher (underlying mortgage rates of ≥ 3.5%). Refinancing efficiencies improved during the period, which in turn increased refinancing risk. Among government sponsored entity (GSE) securities, refinancing guidelines, such as requiring property appraisals, were eased during the period. This made it cheaper and easier to refinance, which also helped to increase prepayment speeds. Within GNMAs, delinquency rates rose, increasing the risk that these loans would be bought out, resulting in a prepayment. Well-capitalized banks such as Wells Fargo and U.S. Bank were efficient at buying out delinquent loans in mortgage pools they serviced. Despite supportive policies from the Fed, these factors combined to depress returns for mortgage-backed securities during the six-month reporting period.
Positioning changes over the period included the following: 1) Reduction in exposure to bonds correlated to credit markets as these sectors quickly recovered, 2) Reduction in principal prepayment risk. We reduced this risk through shifting exposure into lower coupon securities and into CMOs with structures that are locked out from principal cash flows for several years.
Security Selection Decisions Drive Fund Results
The fund’s ability to select securities outside of the Index was beneficial to performance during the six-month reporting period. Adjustable-rate mortgages, agency commercial mortgage-backed securities and CMOs outperformed the broader market during the period. These securities are still government guaranteed, they just are not a part of the Index. Investments in non-government guaranteed securities such as single family rentals and non-agency commercial mortgages also contributed to absolute and relative results. Spreads on these products narrowed during the period, boosting valuations. A majority of the outperformance can be attributed to coupon selection within agency MBS. The fund was underweight coupons which underperformed the broader market due to high refinancing risk. The fund also favored GSE exposure versus GNMA exposure, which was also beneficial, as GNMAs underperformed relative to Fannie Mae securities. Security selection was also beneficial. The fund invested in mortgage pools with more favorable prepayment characteristics than generic mortgages held in the Index. This includes pools with lower loan balances and loans which are more seasoned.
During a period of such successful performance for the fund, no asset classes delivered negative, relative results. However, the least performing asset group were non-deliverable, GNMA specified pools. While they did outperform generic GNMA mortgage securities, they underperformed relative to GSE specified pools.
Anticipating Accommodation and Seeking Opportunities
We think the environment going forward will be influenced by a tug-of-war between COVID-19 risk and the effects of government and central bank intervention. Given the outcome of the election, we believe we will see additional stimulus, but the split house and senate will help to temper the amount. This may help keep rates in check. We foresee the Fed still being involved in supporting the market. We anticipate their purchases will expand to include longer maturity treasuries, keeping longer-term rates
4
lower for longer. It is our opinion that this would support a world of high prepayment speeds. We believe the market might already be pricing in these anticipated higher prepayment speeds. We are looking for areas of the market that might be overpredicting future prepayment speeds and inappropriately depressing prices, such as in GNMAs. We also see a potential opportunity next year in sectors which may not be pricing in a full recovery yet, such as non-agency commercial mortgage securities.
November 16, 2020
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. Class I, Class Y, and Class Z are not subject to any initial or deferred sales charge. Share price, yield and investment return fluctuate such that upon redemption, fund shares may be worth more or less than their original cost. The fund’s return reflects the absorption of certain fund expenses by BNY Mellon Investment Adviser, Inc. pursuant to an agreement in effect through September 1, 2021, at which time it may be extended, modified or terminated. Had these expenses not been absorbed, returns would have been lower. Past performance is no guarantee of future results.
2 Source: Lipper Inc. — The Bloomberg Barclays GNMA Index tracks agency mortgage-backed, pass-through securities guaranteed by Ginnie Mae (GNMA). The Index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage. Investors cannot invest directly in any index.
Bonds are subject generally to interest-rate, credit, liquidity and market risks, to varying degrees, all of which are more fully described in the fund’s prospectus. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes, and rate increases can cause price declines.
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.
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.
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 U.S. Mortgage Fund, Inc. from May 1, 2020 to October 31, 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 |
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Assume actual returns for the six months ended October 31, 2020 |
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| Class A | Class C | Class I | Class Y | Class Z |
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Expense paid per $1,000† | $4.15 | $7.93 | $2.89 | $2.89 | $3.64 |
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Ending value (after expenses) | $1,006.60 | $1,002.90 | $1,008.30 | $1,008.20 | $1,007.70 |
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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 |
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Assuming a hypothetical 5% annualized return for the six months ended October 31, 2020 |
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| Class A | Class C | Class I | Class Y | Class Z |
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Expense paid per $1,000† | $4.18 | $7.98 | $2.91 | $2.91 | $3.67 |
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Ending value (after expenses) | $1,021.07 | $1,017.29 | $1,022.33 | $1,022.33 | $1,021.58 |
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† Expenses are equal to the fund’s annualized expense ratio of .82% for Class A, 1.57% for Class C, .57% for Class I, .57% for Class Y and .72% for Class Z, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
6
STATEMENT OF INVESTMENTS
October 31, 2020 (Unaudited)
Description | Coupon | Maturity | Principal | Value ($) | |||||
Bonds and Notes - 94.9% | |||||||||
Asset-Backed Certificates - .8% | |||||||||
Tricon American Homes, Ser. 2020-SFR1, Cl. B | 2.05 | 7/17/2038 | 2,300,000 | a | 2,341,934 | ||||
Collateralized Municipal-Backed Securities - 1.0% | |||||||||
Federal Home Loan Mortgage Corp. Multifamily Structured Pass-Through Certificates, Ser. Q007, Cl. APT1 | 2.98 | 10/25/2047 | 2,865,933 | b | 2,954,166 | ||||
Commercial Mortgage Pass-Through Ctfs. - 6.0% | |||||||||
BBCMS Mortgage Trust, Ser. 2018-TALL, Cl. A, 1 Month LIBOR +.72% | 0.87 | 3/15/2037 | 1,600,000 | a,c | 1,544,905 | ||||
BFLD Trust, Ser. 2019-DPLO, Cl. A, 1 Month LIBOR +1.09% | 1.24 | 10/15/2034 | 1,800,000 | a,c | 1,748,938 | ||||
GS Mortgage Securities Trust, Ser. 2018-HULA, Cl. A, 1 Month LIBOR +.92% | 1.07 | 7/15/2025 | 2,920,429 | a,c | 2,786,705 | ||||
GS Mortgage Securities Trust, Ser. 2019-70P, Cl. A, 1 Month LIBOR +1.00% | 1.15 | 10/15/2036 | 2,500,000 | a,c | 2,407,414 | ||||
Intown Hotel Portfolio Trust, Ser. 2018-STAY, Cl. A, 1 Month LIBOR +.70% | 0.85 | 1/15/2033 | 3,000,000 | a,c | 2,945,032 | ||||
Starwood Waypoint Homes Trust, Ser. 2017-1, Cl. A, 1 Month LIBOR +.95% | 1.10 | 1/17/2035 | 6,340,328 | a,c | 6,352,456 | ||||
17,785,450 | |||||||||
U.S. Government Agencies Mortgage-Backed - 87.1% | |||||||||
Government National Mortgage Association, Ser. 2010-101, Cl. SH, 1 Month LIBOR +6.65% | 6.50 | 8/16/2040 | 3,602,759 | c | 768,621 | ||||
Government National Mortgage Association, Ser. 2010-89, Cl. Z | 5.00 | 7/20/2040 | 6,880,458 | 7,915,887 | |||||
Government National Mortgage Association, Ser. 2014-145, Cl. KA | 3.50 | 1/20/2038 | 2,137,724 | 2,362,470 | |||||
Government National Mortgage Association, Ser. 2015-176, CI. QZ | 3.50 | 11/20/2045 | 2,589,447 | 2,742,063 | |||||
Government National Mortgage Association, Ser. 2017-176, Cl. BZ | 3.50 | 11/20/2047 | 5,204,363 | 5,626,635 | |||||
Government National Mortgage Association, Ser. 2017-93, Cl. GY | 3.50 | 6/20/2047 | 6,328,975 | 7,026,790 | |||||
Government National Mortgage Association, Ser. 2018-115, Cl. SJ, 1 Month LIBOR +6.20% | 6.05 | 8/20/2048 | 2,884,781 | c | 345,574 | ||||
Government National Mortgage Association, Ser. 2018-120, Cl. PU | 3.50 | 9/20/2048 | 1,375,961 | 1,450,237 |
7
STATEMENT OF INVESTMENTS (Unaudited) (continued)
Description | Coupon | Maturity | Principal | Value ($) | |||||
Bonds and Notes - 94.9% (continued) | |||||||||
U.S. Government Agencies Mortgage-Backed - 87.1% (continued) | |||||||||
Government National Mortgage Association, Ser. 2018-131, Cl. ML | 3.50 | 9/20/2048 | 6,137,973 | 6,660,900 | |||||
Government National Mortgage Association, Ser. 2018-138, Cl. SK, 1 Month LIBOR +6.20% | 6.05 | 10/20/2048 | 2,311,055 | c | 289,906 | ||||
Government National Mortgage Association, Ser. 2018-146, CI. BL | 4.00 | 10/20/2048 | 1,500,000 | 1,592,567 | |||||
Government National Mortgage Association, Ser. 2019-23, Cl. SB, 1 Month LIBOR +6.05% | 5.90 | 2/20/2049 | 3,398,856 | c | 464,379 | ||||
Government National Mortgage Association, Ser. 2019-3, CI. JZ | 4.00 | 1/20/2049 | 851,472 | 933,114 | |||||
Government National Mortgage Association, Ser. 2019-31, CI. AZ | 5.00 | 3/20/2049 | 1,068,138 | 1,245,395 | |||||
Government National Mortgage Association, Ser. 2019-42, CI. AB | 3.25 | 4/20/2049 | 10,986,482 | 11,368,836 | |||||
Government National Mortgage Association, Ser. 2019-57, Cl. NS, 1 Month LIBOR +3.28% | 3.13 | 5/20/2049 | 10,937,417 | c | 666,515 | ||||
Government National Mortgage Association, Ser. 2019-59, Cl. KA | 3.00 | 12/20/2048 | 1,763,857 | 1,853,467 | |||||
Government National Mortgage Association, Ser. 2019-70, Cl. AS, 1 Month LIBOR +6.15% | 6.00 | 6/20/2049 | 2,796,958 | c | 336,841 | ||||
Government National Mortgage Association, Ser. 2020-4, CI. BS, 1 Month LIBOR +5.00% | 4.85 | 1/20/2050 | 10,053,749 | c | 890,537 | ||||
Federal Home Loan Mortgage Corp.: | |||||||||
3.00%, 8/1/2049 | 3,899,971 | b | 4,162,534 | ||||||
4.00%, 5/1/2049 | 3,699,938 | b | 3,954,708 | ||||||
Federal National Mortgage Association: | |||||||||
3.50%, 3/1/2050 | 9,065,082 | b | 9,860,364 | ||||||
4.50%, 1/1/2049 | 4,775,919 | b | 5,274,600 | ||||||
Government National Mortgage Association I: | |||||||||
3.00%, 2/15/2050 | 20,659,002 | 21,442,415 | |||||||
3.50%, 9/15/2041-2/15/2048 | 7,726,959 | 8,487,871 | |||||||
4.00%, 10/15/2039-8/15/2045 | 10,897,309 | 11,889,675 | |||||||
4.50%, 4/15/2039-12/15/2047 | 15,058,989 | 16,818,082 | |||||||
Government National Mortgage Association II: | |||||||||
1.63%, 5/20/2047, 1 Year U.S. Treasury Curve Rate T-Note Constant +1.50% | 4,055,199 | c | 4,179,944 | ||||||
2.00% | 30,000,000 | d | 31,137,890 |
8
Description | Coupon | Maturity |
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Bonds and Notes - 94.9% (continued) | |||||||||
U.S. Government Agencies Mortgage-Backed - 87.1% (continued) | |||||||||
2.00%, 7/20/2047-9/20/2047, 1 Year U.S. Treasury Curve Rate T-Note Constant +1.50% | 6,279,046 | c | 6,477,508 | ||||||
2.50% | 10,000,000 | d | 10,449,219 | ||||||
2.50%, 9/20/2046-11/20/2046, 1 Year U.S. Treasury Curve Rate T-Note Constant +1.50% | 5,603,067 | c | 5,747,340 | ||||||
3.00%, 8/20/2046 | 3,594,647 | 3,876,695 | |||||||
3.50%, 9/20/2042-3/20/2050 | 40,796,886 | 44,582,796 | |||||||
4.00%, 10/20/2047 | 2,245,919 | 2,426,906 | |||||||
4.50%, 12/20/2039-1/20/2050 | 6,574,370 | 7,093,188 | |||||||
5.00%, 11/20/2048-5/20/2050 | 4,608,635 | 5,002,502 | |||||||
257,404,971 | |||||||||
Total Bonds and Notes | 280,486,521 | ||||||||
1-Day | Shares | ||||||||
Investment Companies - 18.6% | |||||||||
Registered Investment Companies - 18.6% | |||||||||
Dreyfus Institutional Preferred Government Plus Money Market Fund | 0.10 | 54,970,232 | e | 54,970,232 | |||||
Total Investments (cost $331,099,778) | 113.5% | 335,456,753 | |||||||
Liabilities, Less Cash and Receivables | (13.5%) | (40,023,813) | |||||||
Net Assets | 100.0% | 295,432,940 |
LIBOR—London Interbank Offered Rate
a Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At October 31, 2020, these securities were valued at $20,127,384 or 6.81% of net assets.
b The Federal Housing Finance Agency (“FHFA”) placed the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association into conservatorship with FHFA as the conservator. As such, the FHFA oversees the continuing affairs of these companies.
c Variable rate security—rate shown is the interest rate in effect at period end.
d Purchased on a forward commitment basis.
e Investment in affiliated issuer. The investment objective of this investment company is publicly available and can be found within the investment company’s prospectus.
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STATEMENT OF INVESTMENTS (Unaudited) (continued)
Portfolio Summary (Unaudited) † | Value (%) |
Mortgage Securities | 94.1 |
Investment Companies | 18.6 |
Asset Backed Securities | .8 |
113.5 |
† Based on net assets.
See notes to financial statements.
10
Statement of TBA Sale Commitments
October 31, 2020 (Unaudited)
Description | Principal | Value ($) | |||||||
Bonds and Notes - 7.1% | |||||||||
U.S. Government Agencies Mortgage-Backed - 7.1% | |||||||||
Federal National Mortgage Association | |||||||||
3.00% | (20,000,000) | a | (20,904,688) | ||||||
Total Sale Commitments (proceeds $(20,883,594)) | (20,904,688) |
a The Federal Housing Finance Agency (“FHFA”) placed the Federal Home Loan Mortgage Corporation and Federal National Mortgage Association into conservatorship with FHFA as the conservator. As such, the FHFA oversees the continuing affairs of these companies.
11
STATEMENT OF INVESTMENTS IN AFFILIATED ISSUERS (Unaudited)
Investment Companies | Value | Purchases ($)† | Sales ($) | Value | Net | Dividends/ |
Registered Investment Companies; | ||||||
Dreyfus Institutional Preferred Government Plus Money Market Fund | 5,257,370 | 109,394,773 | (59,681,911) | 54,970,232 | 18.6 | 13,880 |
† Includes reinvested dividends/distributions.
See notes to financial statements.
12
STATEMENT OF FUTURES
October 31, 2020 (Unaudited)
Description | Number of | Expiration | Notional | Market | Unrealized Appreciation ($) | |
Futures Short | ||||||
U.S. Treasury 10 Year Notes | 130 | 12/21/2020 | 18,174,414 | 17,968,438 | 205,976 | |
U.S. Treasury Long Bond | 140 | 12/21/2020 | 24,543,539 | 24,145,625 | 397,914 | |
Gross Unrealized Appreciation | 603,890 |
See notes to financial statements.
13
STATEMENT OF ASSETS AND LIABILITIES
October 31, 2020 (Unaudited)
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| Cost |
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Assets ($): |
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Investments in securities—See Statement of Investments |
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Unaffiliated issuers | 276,129,546 |
| 280,486,521 |
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Affiliated issuers |
| 54,970,232 |
| 54,970,232 |
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Receivable for investment securities sold |
| 20,901,927 |
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Cash collateral held by broker—Note 4 |
| 1,101,875 |
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Dividends and interest receivable |
| 669,192 |
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Receivable for futures variation margin—Note 4 |
| 76,875 |
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Receivable for shares of Common Stock subscribed |
| 900 |
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Prepaid expenses |
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| 41,540 |
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| 358,249,062 |
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Liabilities ($): |
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Due to BNY Mellon Investment Adviser, Inc. and affiliates—Note 3(c) |
| 173,014 |
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Payable for investment securities purchased |
| 41,634,514 |
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TBA sale commitments, at value (proceeds $20,883,594)—Note 4 |
| 20,904,688 |
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Payable for shares of Common Stock redeemed |
| 25,899 |
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Directors’ fees and expenses payable |
| 9,499 |
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Other accrued expenses |
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| 68,508 |
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| 62,816,122 |
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Net Assets ($) |
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| 295,432,940 |
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Composition of Net Assets ($): |
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Paid-in capital |
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| 297,837,077 |
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Total distributable earnings (loss) |
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| (2,404,137) |
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Net Assets ($) |
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| 295,432,940 |
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Net Asset Value Per Share | Class A | Class C | Class I | Class Y | Class Z |
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Net Assets ($) | 25,652,680 | 813,865 | 2,671,405 | 64,020 | 266,230,970 |
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Shares Outstanding | 1,692,862 | 53,626 | 176,360 | 4,224 | 17,567,383 |
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Net Asset Value Per Share ($) | 15.15 | 15.18 | 15.15 | 15.16 | 15.15 |
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See notes to financial statements. |
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14
STATEMENT OF OPERATIONS
Six Months Ended October 31, 2020 (Unaudited)
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Investment Income ($): |
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|
| ||
Income: |
|
|
|
| ||
Interest |
|
| 2,979,194 |
| ||
Dividends from affiliated issuers |
|
| 13,865 |
| ||
Total Income |
|
| 2,993,059 |
| ||
Expenses: |
|
|
|
| ||
Management fee—Note 3(a) |
|
| 757,592 |
| ||
Service plan fees—Note 3(b) |
|
| 235,566 |
| ||
Shareholder servicing costs—Note 3(c) |
|
| 145,349 |
| ||
Professional fees |
|
| 61,938 |
| ||
Registration fees |
|
| 41,169 |
| ||
Directors’ fees and expenses—Note 3(d) |
|
| 14,407 |
| ||
Prospectus and shareholders’ reports |
|
| 12,880 |
| ||
Chief Compliance Officer fees—Note 3(c) |
|
| 6,796 |
| ||
Custodian fees—Note 3(c) |
|
| 5,643 |
| ||
Loan commitment fees—Note 2 |
|
| 4,469 |
| ||
Miscellaneous |
|
| 18,012 |
| ||
Total Expenses |
|
| 1,303,821 |
| ||
Less—reduction in expenses due to undertaking—Note 3(a) |
|
| (197,225) |
| ||
Net Expenses |
|
| 1,106,596 |
| ||
Investment Income—Net |
|
| 1,886,463 |
| ||
Realized and Unrealized Gain (Loss) on Investments—Note 4 ($): |
|
| ||||
Net realized gain (loss) on investments | 3,537,985 |
| ||||
Net realized gain (loss) on futures | (1,265,838) |
| ||||
Net realized gain (loss) on swap agreements | (572,752) |
| ||||
Capital gain distributions from affiliated issuers | 15 |
| ||||
Net Realized Gain (Loss) |
|
| 1,699,410 |
| ||
Net change in unrealized appreciation (depreciation) on investments | (4,057,024) |
| ||||
Net change in unrealized appreciation (depreciation) on futures | 1,622,205 |
| ||||
Net change in unrealized appreciation (depreciation) on swap agreements | 959,510 |
| ||||
Net Change in Unrealized Appreciation (Depreciation) |
|
| (1,475,309) |
| ||
Net Realized and Unrealized Gain (Loss) on Investments |
|
| 224,101 |
| ||
Net Increase in Net Assets Resulting from Operations |
| 2,110,564 |
| |||
|
|
|
|
|
|
|
See notes to financial statements. |
15
STATEMENT OF CHANGES IN NET ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Year Ended |
| ||
Operations ($): |
|
|
|
|
|
|
|
| |
Investment income—net |
|
| 1,886,463 |
|
|
| 6,351,444 |
| |
Net realized gain (loss) on investments |
| 1,699,410 |
|
|
| 508,766 |
| ||
Net change in unrealized appreciation |
| (1,475,309) |
|
|
| 11,369,917 |
| ||
Net Increase (Decrease) in Net Assets | 2,110,564 |
|
|
| 18,230,127 |
| |||
Distributions ($): |
| ||||||||
Distributions to shareholders: |
|
|
|
|
|
|
|
| |
Class A |
|
| (271,843) |
|
|
| (570,011) |
| |
Class C |
|
| (5,066) |
|
|
| (9,609) |
| |
Class I |
|
| (29,395) |
|
|
| (77,520) |
| |
Class Y |
|
| (814) |
|
|
| (2,053) |
| |
Class Z |
|
| (2,985,753) |
|
|
| (6,585,449) |
| |
Total Distributions |
|
| (3,292,871) |
|
|
| (7,244,642) |
| |
Capital Stock Transactions ($): |
| ||||||||
Net proceeds from shares sold: |
|
|
|
|
|
|
|
| |
Class A |
|
| 449,472 |
|
|
| 2,555,337 |
| |
Class C |
|
| 139,674 |
|
|
| 390,583 |
| |
Class I |
|
| 658,488 |
|
|
| 1,074,079 |
| |
Class Z |
|
| 1,486,157 |
|
|
| 2,176,849 |
| |
Distributions reinvested: |
|
|
|
|
|
|
|
| |
Class A |
|
| 247,683 |
|
|
| 512,468 |
| |
Class C |
|
| 4,994 |
|
|
| 9,007 |
| |
Class I |
|
| 29,252 |
|
|
| 77,127 |
| |
Class Z |
|
| 2,703,328 |
|
|
| 5,951,137 |
| |
Cost of shares redeemed: |
|
|
|
|
|
|
|
| |
Class A |
|
| (862,870) |
|
|
| (4,040,244) |
| |
Class C |
|
| (94,330) |
|
|
| (710,004) |
| |
Class I |
|
| (359,610) |
|
|
| (2,372,456) |
| |
Class Y |
|
| (19,366) |
|
|
| (2,000) |
| |
Class Z |
|
| (11,600,565) |
|
|
| (29,941,721) |
| |
Increase (Decrease) in Net Assets | (7,217,693) |
|
|
| (24,319,838) |
| |||
Total Increase (Decrease) in Net Assets | (8,400,000) |
|
|
| (13,334,353) |
| |||
Net Assets ($): |
| ||||||||
Beginning of Period |
|
| 303,832,940 |
|
|
| 317,167,293 |
| |
End of Period |
|
| 295,432,940 |
|
|
| 303,832,940 |
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Year Ended |
| ||
Capital Share Transactions (Shares): |
| ||||||||
Class Aa |
|
|
|
|
|
|
|
| |
Shares sold |
|
| 29,607 |
|
|
| 170,750 |
| |
Shares issued for distributions reinvested |
|
| 16,300 |
|
|
| 34,316 |
| |
Shares redeemed |
|
| (56,816) |
|
|
| (270,388) |
| |
Net Increase (Decrease) in Shares Outstanding | (10,909) |
|
|
| (65,322) |
| |||
Class Ca |
|
|
|
|
|
|
|
| |
Shares sold |
|
| 9,160 |
|
|
| 26,024 |
| |
Shares issued for distributions reinvested |
|
| 328 |
|
|
| 604 |
| |
Shares redeemed |
|
| (6,184) |
|
|
| (47,657) |
| |
Net Increase (Decrease) in Shares Outstanding | 3,304 |
|
|
| (21,029) |
| |||
Class I |
|
|
|
|
|
|
|
| |
Shares sold |
|
| 43,350 |
|
|
| 72,051 |
| |
Shares issued for distributions reinvested |
|
| 1,926 |
|
|
| 5,169 |
| |
Shares redeemed |
|
| (23,715) |
|
|
| (158,510) |
| |
Net Increase (Decrease) in Shares Outstanding | 21,561 |
|
|
| (81,290) |
| |||
Class Y |
|
|
|
|
|
|
|
| |
Shares redeemed |
|
| (1,270) |
|
|
| (134) |
| |
Net Increase (Decrease) in Shares Outstanding | (1,270) |
|
|
| (134) |
| |||
Class Z |
|
|
|
|
|
|
|
| |
Shares sold |
|
| 97,703 |
|
|
| 145,619 |
| |
Shares issued for distributions reinvested |
|
| 177,878 |
|
|
| 398,414 |
| |
Shares redeemed |
|
| (764,117) |
|
|
| (2,000,892) |
| |
Net Increase (Decrease) in Shares Outstanding | (488,536) |
|
|
| (1,456,859) |
| |||
|
|
|
|
|
|
|
|
|
|
a During the period ended October 31, 2020, 1,981 Class C shares representing $30,211 were automatically converted to 1,985 Class A shares and during the period ended April 30, 2020, 5,831 Class C shares representing $87,409 were automatically converted to 5,837 Class A shares. | |||||||||
See notes to financial statements. |
17
FINANCIAL HIGHLIGHTS
The following tables describe the performance for each share class for the fiscal periods indicated. All information (except portfolio turnover rate) reflects financial results for a single fund share. Total return shows how much your investment in the fund would have increased (or decreased) during each period, assuming you had reinvested all dividends and distributions. These figures have been derived from the fund’s financial statements.
Six Months Ended | ||||||||||
Class A Shares | October 31, 2020 | Year Ended April 30, | ||||||||
(Unaudited) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||
Per Share Data ($): | ||||||||||
Net asset value, | 15.21 | 14.69 | 14.48 | 14.99 | 15.34 | 15.40 | ||||
Investment Operations: | ||||||||||
Investment income—neta | .09 | .29 | .32 | .25 | .24 | .22 | ||||
Net realized and unrealized | .01 | .56 | .20 | (.44) | (.28) | .02 | ||||
Total from Investment Operations | .10 | .85 | .52 | (.19) | (.04) | .24 | ||||
Distributions: | ||||||||||
Dividends from | (.16) | (.33) | (.31) | (.32) | (.31) | (.30) | ||||
Net asset value, end of period | 15.15 | 15.21 | 14.69 | 14.48 | 14.99 | 15.34 | ||||
Total Return (%)b | .66c | 5.87 | 3.63 | (1.25) | (.34) | 1.57 | ||||
Ratios/Supplemental Data (%): | ||||||||||
Ratio of total expenses | .96d | .95 | 1.06 | 1.08 | 1.05 | 1.03 | ||||
Ratio of net expenses | .82d | .91 | 1.06 | 1.07 | 1.05 | 1.03 | ||||
Ratio of net investment income to average net assets | 1.15d | 1.94 | 2.19 | 1.69 | 1.56 | 1.44 | ||||
Portfolio Turnover Ratec | 112.09c | 238.60 | 45.72 | 101.15 | 185.96 | 278.91 | ||||
Net Assets, end of period ($ x 1,000) | 25,653 | 25,920 | 25,980 | 31,550 | 39,308 | 47,354 |
a Based on average shares outstanding.
b Exclusive of sales charge.
c Not annualized.
d Annualized.
e The portfolio turnover rates excluding mortgage dollar roll transactions for the periods ended October 31, 2020, April 30, 2020, 2019, 2018, 2017 and 2016 were 76.70, 165.75%, 30.85%, 59.26%, 64.18% and 104.91%, respectively.
See notes to financial statements.
18
Six Months Ended | |||||||||
Class C Shares | October 31, 2020 | Year Ended April 30, | |||||||
(Unaudited) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||
Per Share Data ($): | |||||||||
Net asset value, | 15.23 | 14.69 | 14.48 | 14.98 | 15.33 | 15.40 | |||
Investment Operations: | |||||||||
Investment income—neta | .03 | .16 | .19 | .13 | .11 | .10 | |||
Net realized and unrealized | .01 | .59 | .20 | (.44) | (.28) | .01 | |||
Total from Investment Operations | .04 | .75 | .39 | (.31) | (.17) | .11 | |||
Distributions: | |||||||||
Dividends from | (.09) | (.21) | (.18) | (.19) | (.18) | (.18) | |||
Net asset value, end of period | 15.18 | 15.23 | 14.69 | 14.48 | 14.98 | 15.33 | |||
Total Return (%)b | .29c | 5.14 | 2.71 | (2.07) | (1.10) | .72 | |||
Ratios/Supplemental Data (%): | |||||||||
Ratio of total expenses | 1.85d | 1.91 | 1.92 | 1.90 | 1.87 | 1.83 | |||
Ratio of net expenses | 1.57d | 1.66 | 1.92 | 1.89 | 1.87 | 1.83 | |||
Ratio of net investment income to average net assets | .39d | 1.14 | 1.33 | .86 | .74 | .64 | |||
Portfolio Turnover Ratec | 112.09c | 238.60 | 45.72 | 101.15 | 185.96 | 278.91 | |||
Net Assets, end of period ($ x 1,000) | 814 | 766 | 1,048 | 1,791 | 3,790 | 4,815 |
a Based on average shares outstanding.
b Exclusive of sales charge.
c Not annualized.
d Annualized.
e The portfolio turnover rates excluding mortgage dollar roll transactions for the periods ended October 31, 2020, April 30, 2020, 2019, 2018, 2017 and 2016 were 76.70, 165.75%, 30.85%, 59.26%, 64.18% and 104.91%, respectively.
See notes to financial statements.
19
FINANCIAL HIGHLIGHTS (continued)
Six Months Ended | ||||||
Class I Shares | October 31, 2020 | Year Ended April 30, | ||||
(Unaudited) | 2020 | 2019 | 2018 | 2017a | ||
Per Share Data ($): | ||||||
Net asset value, beginning of period | 15.20 | 14.67 | 14.46 | 14.99 | 15.40 | |
Investment Operations: | ||||||
Investment income—netb | .10 | .34 | .35 | .25 | .16 | |
Net realized and unrealized | .03 | .55 | .19 | (.42) | (.33) | |
Total from Investment Operations | .13 | .89 | .54 | (.17) | (.17) | |
Distributions: | ||||||
Dividends from | (.18) | (.36) | (.33) | (.36) | (.24) | |
Net asset value, end of period | 15.15 | 15.20 | 14.67 | 14.46 | 14.99 | |
Total Return (%) | .83c | 6.18 | 3.73 | (1.11) | (1.13)c | |
Ratios/Supplemental Data (%): | ||||||
Ratio of total expenses | .73d | .75 | .86 | .93 | .85d | |
Ratio of net expenses | .57d | .66 | .86 | .92 | .84d | |
Ratio of net investment income | 1.35d | 2.28 | 2.40 | 1.84 | 1.56d | |
Portfolio Turnover Ratee | 112.09c | 238.60 | 45.72 | 101.15 | 185.96 | |
Net Assets, end of period ($ x 1,000) | 2,671 | 2,354 | 3,464 | 2,278 | 3,659 |
a From August 31, 2016 (commencement of initial offering) to April 30, 2017.
b Based on average shares outstanding.
c Not annualized.
d Annualized.
e The portfolio turnover rates excluding mortgage dollar roll transactions for the period ended October 31, 2020, April 30, 2020, 2019, 2018 and 2017 were 76.70, 165.75%, 30.85%, 59.26% and 64.18%, respectively.
See notes to financial statements.
20
Six Months Ended | |||||||||
October 31, 2020 | Year Ended April 30, | ||||||||
Class Y Shares | (Unaudited) | 2020 | 2019 | 2018 | 2017 | 2016a | |||
Per Share Data ($): | |||||||||
Net asset value, beginning of period | 15.21 | 14.68 | 14.48 | 14.99 | 15.34 | 15.21 | |||
Investment Operations: | |||||||||
Investment income—netb | .11 | .33 | .35 | .30 | .29 | .16 | |||
Net realized and unrealized | .02 | .57 | .19 | (.45) | (.28) | .18 | |||
Total from Investment Operations | .13 | .90 | .54 | (.15) | .01 | .34 | |||
Distributions: | |||||||||
Dividends from | (.18) | (.37) | (.34) | (.36) | (.36) | (.21) | |||
Net asset value, end of period | 15.16 | 15.21 | 14.68 | 14.48 | 14.99 | 15.34 | |||
Total Return (%) | .82c | 6.20 | 3.80 | (.96) | (.01) | 2.25c | |||
Ratios/Supplemental Data (%): | |||||||||
Ratio of total expenses | .70d | .68 | .82 | .83 | .71 | .75d | |||
Ratio of net expenses | .57d | .66 | .82 | .82 | .71 | .75d | |||
Ratio of net investment income | 1.48d | 2.19 | 2.42 | 1.96 | 1.90 | 1.57d | |||
Portfolio Turnover Ratee | 112.09c | 238.60 | 45.72 | 101.15 | 185.96 | 278.91 | |||
Net Assets, end of period ($ x 1,000) | 64 | 84 | 83 | 81 | 1 | 1 |
a From September 1, 2015 (commencement of initial offering) to April 30, 2016.
b Based on average shares outstanding.
c Not annualized.
d Annualized.
e The portfolio turnover rates excluding mortgage dollar roll transactions for the periods ended October 31, 2020, April 30, 2020, 2019, 2018, 2017 and 2016 were 76.70, 165.75%, 30.85%, 59.26%, 64.18% and 104.91%, respectively.
See notes to financial statements.
21
FINANCIAL HIGHLIGHTS (continued)
Six Months Ended | ||||||||
Class Z Shares | October 31, 2020 | Year Ended April 30, | ||||||
(Unaudited) | 2020 | 2019 | 2018 | 2017 | 2016 | |||
Per Share Data ($): | ||||||||
Net asset value, | 15.21 | 14.69 | 14.48 | 14.99 | 15.34 | 15.41 | ||
Investment Operations: | ||||||||
Investment income—neta | .10 | .31 | .33 | .27 | .25 | .24 | ||
Net realized and unrealized | .01 | .56 | .20 | (.44) | (.28) | .00b | ||
Total from Investment Operations | .11 | .87 | .53 | (.17) | (.03) | .24 | ||
Distributions: | ||||||||
Dividends from | (.17) | (.35) | (.32) | (.34) | (.32) | (.31) | ||
Net asset value, end of period | 15.15 | 15.21 | 14.69 | 14.48 | 14.99 | 15.34 | ||
Total Return (%) | .77c | 5.98 | 3.73 | (1.18) | (.17) | 1.62 | ||
Ratios/Supplemental Data (%): | ||||||||
Ratio of total expenses | .85d | .85 | .95 | .96 | .96 | .91 | ||
Ratio of net expenses | .72d | .81 | .95 | .95 | .95 | .91 | ||
Ratio of net investment income | 1.26d | 2.05 | 2.29 | 1.81 | 1.66 | 1.56 | ||
Portfolio Turnover Ratec | 112.09c | 238.60 | 45.72 | 101.15 | 185.96 | 278.91 | ||
Net Assets, | 266,231 | 274,710 | 286,593 | 313,403 | 360,462 | 399,025 |
a Based on average shares outstanding.
b Amount represents less than $.01 per share.
c Not annualized.
d Annualized.
e The portfolio turnover rates excluding mortgage dollar roll transactions for the periods ended October 31, 2020, April 30, 2020, 2019, 2018, 2017 and 2016 were 76.70, 165.75%, 30.85%, 59.26%, 64.18% and 104.91%, respectively.
See notes to financial statements.
22
NOTES TO FINANCIAL STATEMENTS (Unaudited)
NOTE 1—Significant Accounting Policies:
BNY Mellon U.S. Mortgage Fund, Inc. (the “fund”), which is registered under the Investment Company Act of 1940, as amended (the “Act”), is a diversified open–end management investment company. The fund’s investment objective is to seek to maximize total return, consisting of capital appreciation and current income. 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. Amherst Capital Management LLC (the “Sub-Adviser”), serves as the fund’s sub-investment adviser.
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 1.4 billion shares of $.001 par value Common Stock. The fund currently has authorized six classes of shares: Class A (100 million shares authorized), Class C (100 million shares authorized), Class I (150 million shares authorized), Class Y (150 million shares authorized) and Class Z (900 million shares authorized). Class A shares generally are subject to a sales charge imposed at the time of purchase. Class A shares bought without an initial sales charge as part of an investment of $1 million or more may be charged a contingent deferred sales charge (“CDSC”) of 1.00% if redeemed within one year. Class C shares are subject to a 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 and Class Y shares are sold at net asset value per share generally to institutional investors. Class Z shares are sold at net asset value per share to certain shareholders of the fund. Class Z shares generally are not available for new accounts. Other differences between the classes include the services offered to and the expenses borne 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.
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
23
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
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 fund enters 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.
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.
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used to value the fund’s investments are as follows:
24
Registered investment companies that are not traded on an exchange are valued at their net asset value and are generally categorized within Level 1 of the fair value hierarchy.
Investments in debt securities, excluding short-term investments (other than U.S. Treasury Bills), and futures are valued each business day by one or more independent pricing services (each, a “Service”) approved by the fund’s Board of Directors (the “Board”). Investments for which quoted bid prices are readily available and are representative of the bid side of the market in the judgment of a Service are valued at the mean between the quoted bid prices (as obtained by the Service from dealers in such securities) and asked prices (as calculated by a Service based upon its evaluation of the market for such securities). Securities are valued as determined by a Service, based on methods which include consideration of the following: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and general market conditions. These securities are generally categorized within Level 2 of the fair value hierarchy.
Each Service and independent valuation firm is engaged under the general oversight of the Board.
When market quotations or official closing prices are not readily available, or are determined not to accurately reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded (for example, a foreign exchange or market), but before the fund calculates its net asset value, the fund may value these investments at fair value as determined in accordance with the procedures approved by the Board. Certain factors may be considered when fair valuing investments such as: fundamental analytical data, the nature and duration of restrictions on disposition, an evaluation of the forces that influence the market in which the securities are purchased and sold, and public trading in similar securities of the issuer or comparable issuers. These securities are either categorized within Level 2 or 3 of the fair value hierarchy depending on the relevant inputs used.
For securities where observable inputs are limited, assumptions about market activity and risk are used and such securities are generally categorized within Level 3 of the fair value hierarchy.
Futures, which are traded on an exchange, are valued at the last sales price on the securities exchange on which such securities are primarily traded or at the last sales price on the national securities market on each business day and are generally categorized within Level 1 of the fair value hierarchy.
25
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
The following is a summary of the inputs used as of October 31, 2020 in valuing the fund’s investments:
| Level 1 - | Level 2 - Other Significant Observable Inputs | Level 3 -Significant Unobservable Inputs | Total | |
Assets ($) |
|
|
|
| |
Investments in Securities:† |
|
|
| ||
Asset-Backed | - | 2,341,934 | - | 2,341,934 | |
Collateralized Municipal- | - | 2,954,166 | - | 2,954,166 | |
Commercial | - | 17,785,450 | - | 17,785,450 | |
Investment Companies | 54,970,232 | - | - | 54,970,232 | |
U.S. Government Agencies | - | 257,404,971 | - | 257,404,971 | |
Other Financial Instruments: |
| ||||
Futures†† | 603,890 | - | - | 603,890 | |
Liabilities ($) |
|
|
| ||
TBA Sales Commitments:††† |
|
| |||
U.S. Government Agencies | - | (20,904,688) | - | (20,904,688) |
† See Statement of Investments for additional detailed categorizations, if any.
†† Amount shown represents unrealized (depreciation) at period end, but only variation margin on exchanged traded and centrally cleared derivatives, if any, are reported in the Statement of Assets and Liabilities.
††† See Statement of TBA Sale Commitments 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. Interest income, adjusted for accretion of discount and amortization of premium on investments, is earned from settlement date and recognized on the accrual basis. Securities purchased or sold on a when issued or delayed delivery basis may be settled a month or more after the trade date.
(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 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
26
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 are normally declared and paid on a monthly basis. 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.
On October 30, 2020, the Board declared a cash dividend of $.024, $.015, $.026, $.026 and $.025 per share from undistributed investment income-net for Class A, Class C, Class I, Class Y and Class Z shares, respectively, payable on November 2, 2020, to shareholders of record as of the close of business on October 30, 2020. The ex-dividend date was November 2, 2020.
(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 October 31, 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 October 31, 2020, the fund did not incur any interest or penalties.
27
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
Each tax year in the three-year period ended April 30, 2020 remains subject to examination by the Internal Revenue Service and state taxing authorities.
The fund is permitted to carry forward capital losses for an unlimited period. Furthermore, capital loss carryovers retain their character as either short-term or long-term capital losses.
The fund has an unused capital loss carryover of $10,233,390 available for federal income tax purposes to be applied against future net realized capital gains, if any, realized subsequent to April 30, 2020. The fund has $5,163,841 of short-term capital losses and $5,069,549 of long-term capital losses which can be carried forward for an unlimited period
The tax character of distributions paid to shareholders during the fiscal year ended April 30, 2020 was as follows: ordinary income $7,244,642. The tax character of current year distributions will be determined at the end of the current fiscal year.
(g) New Accounting Pronouncements: In March 2020, the FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848)-Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides optional, temporary relief with respect to the financial reporting of contracts subject to certain types of modifications due to the planned discontinuation of the London Interbank Offered Rate (“LIBOR”) and other IBOR-based reference rates (change to “other interbank offered rates”) as of the end of 2021. The temporary relief provided by ASU 2020-04 is effective for certain reference rate-related contract modifications that occur during the period from March 12, 2020 through December 31, 2022. Management is evaluating the impact of ASU 2020-04 on the fund’s investments, derivatives, debt and other contracts that will undergo reference rate-related modifications as a result of the reference rate reform. Management is also currently actively working with other financial institutions and counterparties to modify contracts as required by applicable regulation and within the regulatory deadlines.
NOTE 2—Bank Lines of Credit:
The fund participates with other long-term open-end funds managed by the Adviser in a $823.5 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
28
amount equal to $688.5 million and is available to all long-term open-ended funds, including the fund, and (ii) Tranche B is an amount equal to $135 million and is available only to BNY Mellon Floating Rate Income Fund, a series of BNY Mellon Investment Funds IV, Inc. Prior to September 30, 2020, the Citibank Credit Facility was $927 million with Tranche A available in an amount equal to $747 million and Tranche B available in an amount equal to $180 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. During the period ended October 31, 2020, the fund did not borrow under the Facilities.
NOTE 3—Management Fee, Sub-Investment Advisory Fee and Other Transactions with Affiliates:
(a) Pursuant to a management agreement (the “Agreement”) with the Adviser, the management fee is computed at the annual rate of .50% of the value of the fund’s average daily net assets and is payable monthly. The Agreement provides that if in any full fiscal year, the aggregate expenses of Class Z shares (excluding taxes, brokerage fees, interest on borrowings and extraordinary expenses) exceed 1½% of the value of Class Z shares’ average daily net assets, the fund may deduct these expenses from payments to be made to the Adviser, or the Adviser will bear, such excess expense with respect to Class Z shares. There was no reimbursement pursuant to the Agreement for Class Z shares during the period ended October 31, 2020.
The Adviser has contractually agreed, from May 1, 2020 through May 31, 2020, to waive receipt of its fees and/or assume the direct expenses of the fund, so that the direct expenses of the fund’s Class A, Class C, Class I, Class Y and Class Z shares (excluding taxes, interest expense, brokerage commission, commitment fees on borrowings and extraordinary expenses) do not exceed an annual rate of .90%, 1.65%, .65%, .65% and .80%, respectively, of the value of the fund’s average daily net assets. On or after August 30, 2020, the Adviser may terminate this expense limitation at any time.
The Adviser has contractually agreed, from June 1, 2020 until September 1, 2021, to waive receipt of its fees and/or assume the direct expenses of the fund, so that the direct expenses of the fund’s Class A, Class C, Class I, Class Y and Class Z shares (excluding taxes, interest, brokerage commissions, commitment fees on borrowings and extraordinary expenses) do not exceed an annual rate of .80%, 1.55%, .55%, .55% and .70%, respectively, of the value of the fund’s average daily net assets. On
29
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
or after November 30, 2021, the Adviser may terminate this expense limitation at any time. The reduction in expenses, pursuant to the undertaking, amounted to $197,225 during the period ended October 31, 2020.
Pursuant to a sub-investment advisory agreement between the Adviser and the Sub-Adviser, the Adviser pays the Sub-Adviser a monthly fee at an annual rate of .24% of the value of the fund’s average daily net assets.
During the period ended October 31, 2020, the Distributor retained $49 from commissions earned on sales of the fund’s Class A shares.
(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 October 31, 2020, Class C shares were charged $3,084 pursuant to the Distribution Plan.
Under the Service Plan adopted pursuant to Rule 12b-1 under the Act, Class Z shares reimburse the Distributor for distributing its shares, for advertising and marketing relating to Class Z shares and servicing shareholder accounts at an amount not to exceed an annual rate of .20% of the value of the average daily net assets of Class Z shares. The Distributor determines the amounts, if any, to be paid to Service Agents (securities dealers, financial institutions or other industry professionals) and the basis on which such payments are made.
The Service Plan also separately provides for Class Z shares to bear the costs of preparing, printing and distributing certain of Class Z prospectuses and statements of additional information and costs associated with implementing and operating the Service Plan, not to exceed the greater of $100,000 or .005% of the value of its average daily net assets for any full fiscal year. During the period ended October 31, 2020, Class Z shares were charged $232,482 pursuant to the Service 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
30
October 31, 2020, Class A and Class C shares were charged $32,534 and $1,028, respectively, pursuant to the 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 are maintained. For financial reporting purposes, the fund includes this interest income and overdraft fees, if any, as interest income in the Statement 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 October 31, 2020, the fund was charged $60,160 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 October 31, 2020, the fund was charged $5,643 pursuant to the custody agreement.
The fund compensates The Bank of New York Mellon under a shareholder redemption draft processing agreement for providing certain services related to the fund’s check writing privilege. During the period ended October 31, 2020, the fund was charged $5,103 pursuant to the agreement, which is included in Shareholder servicing costs in the Statement of Operations.
During the period ended October 31, 2020, the fund was charged $6,796 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 $125,763, Distribution Plan fees of $39,065, Shareholder Services Plan fees of $22,127, custodian fees of $3,000, Chief Compliance Officer
31
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
fees of $4,546 and transfer agency fees of $21,619, which are offset against an expense reimbursement currently in effect in the amount of $43,106.
(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 (including paydowns) of investment securities, excluding short-term securities, futures and swap agreements, during the period ended October 31, 2020, amounted to $334,046,917 and $356,151,503, respectively, of which $105,460,382 in purchases and $105,654,907 in sales were from mortgage dollar roll transactions.
Mortgage Dollar Rolls: A mortgage dollar roll transaction involves a sale by the fund of mortgage related securities that it holds with an agreement by the fund to repurchase similar securities at an agreed upon price and date. The securities purchased will bear the same interest rate as those sold, but generally will be collateralized by pools of mortgages with different prepayment histories than those securities sold. The fund accounts for mortgage dollar rolls as purchases and sales transactions. The fund executes mortgage dollar rolls entirely in the To-Be-Announced (“TBA”) market.
TBA Securities: During the period ended October 31, 2020, the fund transacted in TBA securities that involved buying or selling mortgage-backed securities on a forward commitment basis. A TBA transaction typically does not designate the actual security to be delivered and only includes an approximate principal amount; however, delivered securities must meet specified terms defined by industry guidelines, including issuer, rate and current principal amount outstanding on underling mortgage pools. TBA securities subject to a forward commitment to sell at period end are included at the end of the fund’s Statement of Investments under the caption “Statement of TBA Sale Commitments.” The proceeds and value of these commitments are reflected in the fund’s Statement of Assets and Liabilities as Receivable for TBA sale commitments (included in receivable securities sold) and TBA sale commitments, at value, respectively.
Derivatives: A derivative is a financial instrument whose performance is derived from the performance of another asset. Each type of derivative instrument that was held by the fund during the period ended October 31, 2020 is discussed below.
32
Futures: In the normal course of pursuing its investment objective, the fund is exposed to market risk, including interest rate risk, as a result of changes in value of underlying financial instruments. The fund invests in futures in order to manage its exposure to or protect against changes in the market. A futures contract represents a commitment for the future purchase or a sale of an asset at a specified date. Upon entering into such contracts, these investments require initial margin deposits with a counterparty, which consist of cash or cash equivalents. The amount of these deposits is determined by the exchange or Board of Trade on which the contract is traded and is subject to change. Accordingly, variation margin payments are received or made to reflect daily unrealized gains or losses which are recorded in the Statement of Operations. When the contracts are closed, the fund recognizes a realized gain or loss which is reflected in the Statement of Operations. There is minimal counterparty credit risk to the fund with futures since they are exchange traded, and the exchange guarantees the futures against default. Futures open at October 31, 2020 are set forth in the Statement of Futures.
Swap Agreements: The fund enters into swap agreements to exchange the interest rate on, or return generated by, one nominal instrument for the return generated by another nominal instrument. Swap agreements are privately negotiated in the OTC market or centrally cleared. The fund enters into these agreements to hedge certain market or interest rate risks, to manage the interest rate sensitivity (sometimes called duration) of fixed income securities, to provide a substitute for purchasing or selling particular securities or to increase potential returns.
For OTC swaps, the fund accrues for interim payments on a daily basis, with the net amount recorded within unrealized appreciation (depreciation) on swap agreements in the Statement of Assets and Liabilities. Once the interim payments are settled in cash, the net amount is recorded as a realized gain (loss) on swaps, in addition to realized gain (loss) recorded upon the termination of swap agreements in the Statement of Operations. Upfront payments made and/or received by the fund, are recorded as an asset and/or liability in the Statement of Assets and Liabilities and are recorded as a realized gain or loss ratably over the agreement’s term/event with the exception of forward starting interest rate swaps which are recorded as realized gains or losses on the termination date.
Upon entering into centrally cleared swap agreements, an initial margin deposit is required with a counterparty, which consists of cash or cash equivalents. The amount of these deposits is determined by the exchange on which the agreement is traded and is subject to change. The change in valuation of centrally cleared swaps is recorded as a receivable or payable
33
NOTES TO FINANCIAL STATEMENTS (Unaudited) (continued)
for variation margin in the Statement of Assets and Liabilities. Payments received from (paid to) the counterparty, including upon termination, are recorded as realized gain (loss) in the Statement of Operations.
Fluctuations in the value of swap agreements are recorded for financial statement purposes as unrealized appreciation or depreciation on swap agreements.
Interest Rate Swaps: Interest rate swaps involve the exchange of commitments to pay and receive interest based on a notional principal amount. The fund may elect to pay a fixed rate and receive a floating rate, or receive a fixed rate and pay a floating rate on a notional principal amount. The net interest received or paid on interest rate swap agreements is included within realized gain (loss) on swap agreements in the Statement of Operations. Interest rate swap agreements are subject to general market risk, liquidity risk, counterparty risk and interest rate risk. At October 31, 2020, there were no outstanding interest rate swaps.
The following summarizes the average market value of derivatives outstanding during the period ended October 31, 2020:
|
| Average Market Value ($) |
Interest rate futures |
| 38,386,295 |
|
|
|
The following summarizes the average notional value of swap agreements outstanding during the period ended October 31, 2020:
|
| Average Notional Value ($) |
Interest rate swap agreements |
| 28,428,571 |
|
|
|
At October 31, 2020, accumulated net unrealized appreciation on investments inclusive of derivatives contracts was $4,939,771, consisting of $5,849,388 gross unrealized appreciation and $909,617 gross unrealized depreciation.
At October 31, 2020, the cost of investments inclusive of derivatives contracts for federal income tax purposes was substantially the same as the cost for financial reporting purposes (see the Statement of Investments).
34
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited)
At a meeting of the fund’s Board of Directors held on May 11, 2020, the Board considered the renewal of the fund’s Management Agreement, pursuant to which the Adviser provides the fund with investment advisory and administrative services, and the Sub-Investment Advisory Agreement (together, the “Agreements”), pursuant to which Amherst Capital Management LLC (the “Subadviser”) provides day-to-day management of the fund’s investments. The Board members, a majority of whom are not “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 and the Subadviser. In considering the renewal of the Agreements, 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, as well as the Adviser’s supervisory activities over the Subadviser.
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 based on classifications provided by Thomson Reuters Lipper, which included information comparing (1) the performance of the fund’s Class Z shares with the performance of a group of retail no-load Government National Mortgage Association securities (“GNMA”) funds selected by Broadridge as comparable to the fund (the “Performance Group”) and with a broader group of funds consisting of all retail and institutional GNMA funds (the “Performance Universe “), all for various periods ended March 31, 2020 and (2) the fund’s actual and contractual management fees and total expenses with
35
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
those of the same group of funds in the Performance Group (the “Expense Group”) and with a broader group of retail no-load GNMA 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 Board with a description of the methodology Broadridge used to select the Performance Group and Performance Universe and the Expense Group and Expense Universe.
Performance Comparisons. 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 and the end date selected. The Board discussed with representatives of the Adviser and the Subadviser the results of the comparisons and considered that the fund’s total return performance was below the Performance Group and Performance Universe medians for all periods. The Board also considered that the fund’s yield performance was below the Performance Group and Performance Universe medians for all ten one-year periods ended March 31st. The Board discussed with representatives of the Adviser and Sub-Adviser the reasons for the fund’s underperformance versus the Performance Group and Performance Universe during the periods under review and noted the relative proximity of the fund’s total return performance to the Performance Universe median in certain periods. It was noted that there were only four other funds in the Performance Group. The Adviser also provided a comparison of the fund’s calendar year total returns to the returns of the fund’s benchmark index.
Management Fee and Expense Ratio Comparisons. 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 and sub-advisory services provided by the Adviser and the Subadviser, respectively. In addition, the Board reviewed and considered the actual management fee rate paid by the fund over the fund’s last fiscal year which included reductions for a fee waiver arrangement in place that reduced the management fee paid to the Adviser, but did not reflect the full amount of such reduction as the expense limitations were lowered on June 1, 2020.
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 equal to the Expense Group median contractual management fee, the fund’s actual management fee was lower than the Expense Group median and higher than the Expense Universe median actual management fee and the fund’s total expenses were lower than the Expense Group median and higher than the Expense Universe median total expenses. It was noted there were only four other funds in the Expense Group and six other funds in the Expense Universe.
Representatives of the Adviser stated that the Adviser has contractually agreed, until September 1, 2021, to waive receipt of its fees and/or assume the direct expenses of the fund so that the direct expenses of the fund’s Class A, C, I, Y and Z shares (excluding
36
taxes, interest, brokerage commissions, commitment fees on borrowings and extraordinary expenses) do not exceed .80%, 1.55%, .55%, .55% and .70% for Class A, C, I, Y and Z shares of the fund’s average daily net assets.
Representatives of the Adviser noted that there were no other funds advised or administered by the Adviser that are in the same Lipper category as the fund or 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.
The Board considered the fee to the Subadviser in relation to the fee paid to the Adviser by the fund and the respective services provided by the Subadviser and the Adviser. The Board also took into consideration that the Subadviser’s fee is paid by the Adviser (out of its fee from the fund) and not 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 considered the expense limitation arrangement and its effect on the profitability of 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 Agreements, considered in relation to the mix of services provided by the Adviser and the Subadviser, including the nature, extent and quality of such services, supported the renewal of the Agreements 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. Since the Adviser, and not the fund, pays the Subadviser pursuant to the Sub-Investment Advisory Agreement, the Board did not consider the Subadviser’s profitability to be relevant to its deliberations. Representatives of the Adviser stated that a discussion of economies of scale is predicated on a fund having achieved a substantial size with increasing assets and that, if a fund’s assets had been stable or decreasing, the possibility that the Adviser may have realized any economies of scale would be less. 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 and the Subadviser from acting as investment adviser
37
INFORMATION ABOUT THE RENEWAL OF THE FUND’S MANAGEMENT AND SUB-INVESTMENT ADVISORY AGREEMENTS (Unaudited) (continued)
and sub-investment adviser, respectively, 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 Agreements. 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 and the Subadviser are adequate and appropriate.
· The Board agreed to closely monitor performance and determined to approve renewal of the Agreements for the remainder of the one-year term.
· The Board concluded that the fees paid to the Adviser and the Subadviser continued to be appropriate under the circumstances and in light of the factors and the totality of the services provided as discussed above, subject to review no later than the next renewal consideration.
· 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 Agreements, 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 and the Subadviser, of the Adviser and the Subadviser and the services provided to the fund by the Adviser and the Subadviser. 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 Agreements, 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 Agreements 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 Agreements for the remainder of the one-year term.
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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.
39
LIQUIDITY RISK MANAGEMENT PROGRAM (Unaudited) (continued)
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.
40
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41
BNY Mellon U.S. Mortgage Fund, Inc.
240 Greenwich Street
New York, NY 10286
Adviser
BNY Mellon Investment Adviser, Inc.
240 Greenwich Street
New York, NY 10286
Sub-Adviser
Amherst Capital Management LLC
444 Madison Avenue, 19th Floor
New York, NY 10022
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 Street
New York, NY 10286
Ticker Symbols: | Class A: GPGAX Class C: GPNCX Class I: GPNIX Class Y: GPNYX Class Z: DRGMX |
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-mail Send your request to info@bnymellon.com
Internet Information can be viewed online or downloaded at www.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 at www.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 at www.bnymellonim.com/us and on the SEC’s website at www.sec.gov and without charge, upon request, by calling 1-800-373-9387.
© 2020 BNY Mellon Securities Corporation |
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures applicable to Item 10.
Item 11. Controls and Procedures.
(a) The Registrant's principal executive and principal financial officers have concluded, based on their evaluation of the Registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report, that the Registrant's disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the required time periods and that information required to be disclosed by the Registrant in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Registrant's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes to the Registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable.
Item 13. Exhibits.
(a)(1) Not applicable.
(a)(3) Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
BNY Mellon U.S. Mortgage Fund, Inc.
By: /s/ Renee LaRoche-Morris
Renee LaRoche-Morris
President (Principal Executive Officer)
Date: December 22, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ Renee LaRoche-Morris
Renee LaRoche-Morris
President (Principal Executive Officer)
Date: December 22, 2020
By: /s/ James Windels
James Windels
Treasurer (Principal Financial Officer)
Date: December 22, 2020
EXHIBIT INDEX
(a)(2) Certifications of principal executive and principal financial officers as required by Rule 30a-2(a) under the Investment Company Act of 1940. (EX-99.CERT)
(b) Certification of principal executive and principal financial officers as required by Rule 30a-2(b) under the Investment Company Act of 1940. (EX-99.906CERT)