Where next for interest rates and portfolios?

With interest rates under scrutiny, Tom Stevenson, investment director for personal investing at Fidelity International, looks at some funds that could benefit from a rate rise but also some funds that may continue to do well if the UK economy remains subdued and the Bank of England continues to maintain the status quo.

Where next for interest rates and portfolios?

The Bank of England Governor Mark Carney has become increasingly hawkish about the prospect of hiking interest rates in the “relatively near term” with inflation running nearly one percentage point higher than the Bank’s target. However, recent economic data has suggested that the UK economy may not be in such rude health, which could put the brakes on any tightening of interest rates.

If the Bank of England does pull the trigger on a rate hike in next month’s Monetary Policy Committee meeting, it will be the first time it has done so in over two decades. While the rate hike may only nudge the base rate back up to 0.5%, such a move could pave the way for further rate hikes in the coming months if the economy picks up more quickly.

While rising interest rates are likely to hurt homeowners, particularly those on variable rate mortgages, it could spell good news for investors that are exposed to cyclical sectors of the economy. In particular, financial stocks stand to do well as they profit from wider lending spreads when interest rates rise.

Here are two funds that could benefit in such an environment:

Fidelity Special Situations

The fund has employed a contrarian stock picking strategy since its launch in 1979. Alex Wright took the helm of the fund in 2014 and, like his predecessors Anthony Bolton and Sanjeev Shah, focuses on finding unloved companies entering a period of positive change.

Importantly, Alex holds more than a quarter of its portfolio in financials, including Citigroup and Lloyds Banking Group, both of which stand to benefit if interest rates rise.

Franklin UK Smaller Companies

If the economy is expanding investors will start to  favour smaller companies, which tend to have a more domestic focus. A fund to play this on the Select 50 is the Franklin UK Smaller Companies Fund.

The fund is managed by Richard Bullas who looks for ‘hidden gems’: smaller companies which the rest of the market has ignored. He runs a concentrated portfolio of 40 to 50 stocks ranging in size from £100m to £1bn, though he thinks that ‘£100m to £500m is the sweet spot for us’.

If however, the latest set of GDP figures are a sign of further things to come and the outlook for the UK economy continues to remains challenging, the Old Lady of Threadneedle Street may be forced to keep rates at record lows. If this is the case, we could see defensive funds that act like bond proxies continue to perform well.

Here are two funds that are well positioned if the economic picture doesn’t improve and the bank is forced to keep rates as they are.

JOHCM UK Equity Income Fund

In a persistently low interest rate world it may be sensible to allocate towards an equity income fund such as the JOHCM UK Equity Income Fund.

The fund is managed by Clive Beagles, who looks for dividend-paying companies which yield more than the market average on a 12-month prospective basis. Clive typically favours value stocks but only buys companies if they also have the ability to grow their earnings and dividend over time.

Lindsell Train UK Equity Fund

Nick Train thinks about investing as owning part of a business, rather than ‘owning a piece of paper or some sort of electronic signal on a screen’. He looks for undervalued, profitable companies whose brands and market positions allow them to ‘offer something truly unique.’

As part of this investment philosophy, Nick tends to favour defensive bond-proxy shares which tend to outperform cyclical shares when the economy is turning down.


Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change. 

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