With interest rates expected to continue on a downward trajectory, you may be wondering how to adjust your investment strategy to make the most of the shifting economic landscape.
Earlier this month, the Bank of England took the significant step of loosening monetary policy for the first time in four years, cutting the base rate from 5.25% to 5%.
Analysts are predicting another two interest rate cuts from the Bank this year. Markets are currently pricing in a 45% chance of a rate reduction at the next meeting on 19 September.
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Tumbling interest rates mark a big change from the relentless hikes seen over the last few years, and investors may be feeling unsure about how to position their portfolios. The decline in savings rates could also prompt some savers to turn to investing to compensate for the lack of interest on their cash.
“Falling interest rates can create new opportunities for personal investors,” comments Tom Stevenson, investment director at Fidelity International.
For example, the decline in cash savings rates makes bonds and other income-generating assets more attractive by comparison.
Sectors like housebuilding and consumer spending could fare well during a time of interest rate cuts, while commercial property, infrastructure and gold investments may also benefit.
We reveal the experts’ top tips for funds and investment trusts likely to perform well during falling interest rates.
Bond funds
Bonds benefit most directly from falling interest rates because their prices rise as yields drop. Although note that while creditworthy government and corporate bonds typically gain value, bonds from other issuers may decline as recession fears increase default risks.
Short-dated high-quality government and corporate bonds are currently boasting attractive yields.
Dzmitry Lipski, head of funds research at Interactive Investor, says Jupiter Strategic Bond could be a good pick.
He calls the fund “a ‘go anywhere’, high-conviction fund, meaning the managers are able to seek out the best opportunities within the fixed-interest universe on a global basis while carefully managing downside risk.”
Lipski adds: “The fund is managed by a highly experienced managers, Ariel Bezalel and Harry Richards, supported by the wider, well-resourced fixed income team at Jupiter. Around 60% of the portfolio is invested in corporate and over 20% are in government bonds.
“Currently the yield is over 4%. The fund has shown strong performance and resilience over the long term and provides an attractive yield. Given the fund’s flexibility and focus on downside protection, this makes it a strong core option for investors within a well-diversified portfolio.”
The investment platform also highlights Royal London Corporate Bond as another fund that could perform well while interest rates are falling.
The fund has a distribution yield of 5.83%, well ahead of the inflation rate, with income paid out every three months.
Income funds
If you’re looking for an income fund that invests in the stock market rather than bonds, Interactive Investor suggests investors may like to consider the Artemis Income Fund.
It says: “The Artemis Income Fund is a flexible, high-conviction portfolio of UK large-cap stocks. The strategy benefits from a highly experienced team that has consistently applied a sensible, tried-and-tested approach, which has seen the fund become one of the most highly regarded in the sector.”
The fund prefers to hold companies that can consistently generate strong cash flows, which is key to fuelling the dividend that shareholders receive.
It aims to provide investors with a steady and growing income along with capital growth over five years. Its yield has stood at 3.5% over the past 12 months.
Property trusts
Commercial property and infrastructure are also usually beneficiaries of a falling interest rate environment.
It can be worth looking for an investment trust rather than an open-ended fund as the former tends to have borrowed money, so falling rates should cut their interest bills.
Stevenson at Fidelity picks out the Balanced Commercial Property Trust for investors to consider. “It yields 5% and is trading at a 18.45% discount, offering potential upside as borrowing costs decrease.”
Interactive Investor highlights TR Property Trust. The listed portfolio is diversified across sectors and holds roughly one-third in UK and two-thirds in Europe.
“The trust yields around 4.6%, far surpassing its benchmark, and has an impressive record of growing the distributions year-on-year. It will occasionally pay distributions using revenue reserves, though this is prudently managed, and a healthy reserve is maintained to deal with potential earnings shortfalls,” says Interactive Investor.
Infrastructure funds and trusts
Infrastructure investments also stand to benefit from lower rates. They are “bond-like” in that they’re considered to be defensive because they are less sensitive to economic growth and can provide stable returns.
Stevenson comments: “For those looking to reposition their portfolios, a fund to consider is First Sentier Global Listed Infrastructure, which currently yields 3.3% and invests in infrastructure companies which stand to benefit from lower rates. The fund is open-ended but avoids liquidity problems by investing in the shares of listed infrastructure companies (one holding is Britain’s National Grid) rather than in infrastructure assets themselves.”
Another option, according to Stevenson, is International Public Partnerships, an infrastructure investment trust yielding 5.6% and currently trading at a 17.01% discount. “This trust offers exposure to essential assets like hospitals and railways, making it a solid choice for those seeking stable income.”
If you’re looking for individual shares to buy when rates are falling, read What do interest rate cuts mean for investors?
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