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4 August 2016

Four funds to take advantage of the interest rate cut

The Bank of England today cut its official interest rate for the first time since 2009, down from 0.5% to 0.25%. It also announced an economic stimulus program of up to £170bn, which will comprise government and corporate bond buying (quantitative easing or QE) and funding to help banks lend.

Commenting on the interest rate cut and new stimulus measures, Darius McDermott, managing director of FundCalibre, said: “This comprehensive package is an acceptance of substantial economic uncertainty, and an acknowledgement that, at least over the next two year period, things are going to be very challenging.

“The Bank of England's monetary policy committee is obviously worried about the possibility of recession and has pretty much thrown the kitchen sink at the problem.”

From an investment point of view, corporate bonds and bond proxies (large, long-established, stable companies) should all do well as a result of the action. Larger UK companies with dollar earnings should also do well, as today's actions are causing the pound to fall further, making profits earned overseas worth more when converted back into sterling.

Learn more: Currency and its impact on investments

In buoying the UK domestic economy, the actions should also be supportive for domestically-focused UK smaller and medium-sized companies. Lower mortgage rates should hopefully encourage people to spend more in other areas of the economy, such as restaurants, retail and other services.

In contrast, most cash savers will now be losing money in real terms. For this reason, even more than ever before, long-term conservative savers may need to consider slightly riskier investments in order to generate returns and keep ahead of inflation.

Two equity funds

On the equity front, we like the Elite Rated Evenlode Income and Standard Life Investments Global Equity Income. The Evenlode fund has almost all of its top holdings in companies that get most of their revenue in US dollars. It also focuses on stable stocks with strong dividend yields (and growing dividends), which makes it an appealing option to investors seeking income in a low interest rate world.

The Standard Life Investments fund offers diversified sources of income from companies around the world. UK investors will benefit should the pound fall further as most of the portfolio holdings are denominated in other currencies.

Two bond funds

On the bond front, we think the Elite Rated Royal London Corporate Bond and MI TwentyFour Dynamic Bond have the potential to do well in an environment where the Bank of England is buying corporate bonds and thereby pushing up the value of bonds at the higher risk end of the fixed interest scale.

Where to next?

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.