Six funds for a low interest rate environment
We asked three experts to highlight their equity and bond fund picks for a low interest rate environment.
Tom Stevenson, investment director for personal investing at Fidelity International, recommends Invesco Perpetual European Equity Income. He says: 'Managed by Stephanie Butcher, it adopts a highly collegiate approach and focuses on sharing ideas and materials.
“She and her team members will typically conduct over 400 company meetings each year and, while the meetings themselves may not result in an investment in a given company, they often provide interesting insights into suppliers or competitors not previously considered.
“Butcher and her team use screening tools to filter stocks which look attractive from a valuation perspective and which may warrant further investigation. She then looks to build a diversified portfolio of stocks with good dividend prospects.”
Brian Dennehy, managing director of fundexpert.co.uk, agrees that the IP European Equity Income fund, which has a yield of 3.1%, is interesting. But he points out that the fund only launched in 2012, so there is no decent track record on income payouts yet.
Mr Dennehy says that while Europe has “some valuation attractions (unlike the US), the EU project is very fragile, and these macro risks are very real, as Brexit illustrated”.
He adds: “This might be an opportunity for the brave, but "safe and reliable" it isn't. Nothing is safe and reliable, so it is all about moving the odds of success in your favour.”
Gavin Haynes, managing director of wealth manager Whitechurch Securities, favours dividend-producing UK funds.
“In particular, I am looking for funds that invest in quality businesses that can grow dividends despite a low-growth climate - but the key is to find stockpickers who can unearth these gems at reasonable valuations. I would recommend Evenlode Income, managed by Hugh Yarrow; and Woodford Equity Income, under Neil Woodford.”
- Woodfood Equity Income is part of the Moneywise First 50 funds.
“I would also extol the virtues of having an internationally diversified equity income portfolio. Although having overseas funds does add currency risk, I believe this is outweighed by the added level of diversification it can provide a portfolio, with opportunities across global markets to invest in attractive dividend stocks. Newton Global Income is a solid choice in this area.”
Mr Haynes says that fixed interest will remain supported by a lower-for-longer interest rate environment.
“Although I struggle to be attracted by the lack of yields on offer from government bonds, I prefer to utilise strategic bond funds that invest across the fixed income spectrum.
“Jupiter Strategic Bond managed by the highly regarded Ariel Bezalel takes a special situations approach to seeking out value across global bond markets.”
- Jupiter Strategic Bond is also part of the Moneywise First 50 funds.
Another of Mr Haynes' favourites in this area is Henderson Strategic Bond, managed by John Patullo and Jenna Barnard.
This fund will invest in all types of bonds from government to corporate bonds and across the risk spectrum holding investment grade and high yield bonds.
Historically, many income seekers would never ordinarily have chosen 'risk investments' as a solution, says Mr Dennehy. A large emphasis would have been placed on building society or bank deposits, or, where a pension fund was being deployed, an annuity would be purchased.
“Even now a good proportion of such people will struggle on, emphasising low-return deposit accounts with their savings. Sadly the problem is often a lack of understanding of alternatives and a concern that sources of decent advice are too expensive or unreliable. The solution is often extending one's working life or downsizing the house.”
He argues that the best solution is more often than not income funds linked to the stock markets (so-called equity income funds).
“To take advantage of this potential, income seekers must adjust their mental approach. This means not obsessing about the day-to-day moves of the capital value, and rather focusing on the lack of volatility and relative predictability of the income being paid out to you year after year.”
But he cautions that if there were extreme stock market falls such as occurred in 2008/09, worried finance directors would cut dividend payouts. In 2008/09, some equity income funds cut payouts by 30%.
“These sorts of occasions are rare, perhaps once every 30 years on average - but that doesn't mean it can't happen twice in 10 years,” observes Dennehy.
“Income levels have been rebuilt by funds since 2008/09, which is very encouraging, but this risk needs to be understood. It also means you should have a reserve of capital, which can be brought into play in a two- to five-year period during a long retirement when income might come under pressure in this way.”
This article was originally written for our sister magazine, Money Observer.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
A stockmarket security (a form of derivative) issued by companies on their own ordinary shares to raise capital. A warrant has a quoted price of its own that can be converted into a specific share at a predetermined price (called the conversion price) and future date. The value of the warrant is determined by the premium of the share price over the conversion price of the warrant. Warrants give the same economic exposure to an underlying security without actually owning it, and cost a fraction of the price of the underlying security.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.