Hargreaves Lansdown analysts have picked out three funds to consider for falling interest rates.
Fund pickers at the UK’s largest retail brokerage hone in on falling interest rates and their impact on the wider market. Three selections cover a range of asset classes, including the UK mid-cap equity sector and fixed-income assets.
After the Bank of England began cutting rates in August, savings rates available from banks are starting to fall. Investing in equities or bonds is, of course, much higher risk than simply having cash in the bank, but they do offer the opportunity for greater returns over the long term for those willing to accept higher risk to their savings.
Hal Cook, senior investment analyst at Hargreaves Lansdown, outlines the attractions of the three funds in his own words:
Invesco Tactical Bond
“Invesco Tactical Bond is very well placed to take advantage of a rate cutting cycle. They’ve been altering their investments to benefit from rate cuts more recently. This is best illustrated by their duration position which, at around 7 years, is close to the highest it has been over the last ten years in the fund. Duration is a measure of how sensitive an investment is to interest rate changes and is measured in years. The higher the duration value, the more sensitive the investment is to interest rate changes.
FTF Martin Currie UK Mid Cap fund
If it’s shares you’re looking at, then smaller companies present an interesting opportunity in a rate cutting environment. Smaller companies have generally struggled during the period of rising rates. This is partly because their revenues can be more linked to the health of the economy and partly because their cost of borrowing is often not fixed. The opposite is true as rates come back down, making them an interesting investment.
Smaller companies in the UK could be a good place to invest, especially with this part of the UK market trading on a significant discount to their larger counterparts. The FTF Martin Currie UK Mid Cap fund is a good option in this space. Richard Bullas has managed the fund since 2013 and is a UK smaller companies’ expert that we hold in high regard.
Baillie Gifford Sustainable Income fund
Finally, for more cautious investors, multi-asset funds might be appealing – particularly those with investments in bonds and investment trusts. Investment trusts have struggled during the rate rising cycle, especially those that invest in property and infrastructure. This is largely because one of the key attractions of these trusts is the income that they pay. As interest rates and bond yields have increased, the demand for these types of trusts has fallen because the level of income they pay is not much more than cash or bonds now. This has resulted in a number of them trading at a discount to their net asset value. On a forward-looking basis, this has the potential to reverse and add to the returns of these trusts, however, there are no guarantees.
The Baillie Gifford Sustainable Income fund is a good option in this environment. It’s neutral asset allocation includes around a third invested in infrastructure and property and a further a third invested in bonds. The remainder is usually invested in shares and cash. It’s managed by a number of experienced individuals at Baillie Gifford and the diversified nature of the fund means that even if rate cuts have differing impacts on different regions and asset classes, the fund has potential to benefit from them.”