ii experts name top picks on where to invest when rates are falling

• ii market expert Richard Hunter reminds investors that when it comes to individual stocks, you shouldn’t take the dividend yield as the sole reason to invest
• ii’s fund team explains that interest-rate sensitive sectors can be expected to perform well, for example, property securities 
• ii experts also explain that falling rates could offer positive returns for investors when it comes to fixed-income investments

With the Bank of England’s interest rate having had its first cut since 2020 and the expectation that rates will continue to fall, many investors may be wondering where to turn when it comes to their next investment choices. To offer a helping hand, experts at ii discuss a variety of potential picks across equities, funds, investment trusts, and bonds. 

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Equities

When it comes to investing in individual stocks, Richard Hunter, head of markets at interactive investor, reminds us that you should not take the dividend yield as the sole reason to invest. 

He says: “The FTSE as a whole currently yields 3.7% on average. As with any form of investment, however, the dividend yield should not be taken in isolation as a reason to invest and, in any event, it may not tell the full story. 

“Dividend yield is calculated as the amount of the dividend divided by the share price, expressed as a percentage.

“This is important because, all things being equal, if a share price falls, the dividend yield will rise. A seemingly healthy dividend yield could, therefore, be the result of a falling share price – and a company which is potentially in trouble. Vodafone Group (LSE:VOD), for example, currently has a dividend yield of 11.1%, but over the last year the shares have fallen by 6% (and by 43% over the last two).

“In addition, while a yield of 5% may seem punchy and attractive, it should be looked at in the context of the company’s dividend cover.

“Dividend cover is effectively the number of times the company could pay a dividend to shareholders from current earnings. Generally, a dividend cover of 1.5 or above is seen as perfectly acceptable, whereas anything below 1 is indicative that dividends are being paid from reserves, which ultimately is unsustainable, although by the same token the negative figure could be the result of an exceptional item which has reduced earnings, such as an acquisition.

“Overcoming these hurdles – a high yield, adequate cover, an acceptable share price performance and a positive market consensus on prospects, two stocks emerge – British American Tobacco (LSE:BATS) and HSBC Holdings (LSE:HSBA).”

Funds and investment trusts

When it comes to funds and investment trusts, ii’s fund research team have plenty of suggestions to shout about. Tom Bigley, fund analyst at interactive investor, suggests investors may want to look at the Artemis Income fund. 

He says: “The Artemis Income Fund is a flexible, high-conviction portfolio of UK large-cap stocks included in the ii Super 60 list of investment ideas. 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.

“Management has a clear mantra of ‘cash flow first and dividends second’. In short, they prefer to hold companies that can consistently generate strong cash flows, which is key to fuelling the dividend that shareholders receive. The fund is unlikely to significantly underperform or outperform over shorter-term periods. However, the consistency of approach has delivered strong returns over the long term.

“The fund has a straightforward objective of providing 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.”

More interest-rate sensitive sectors can be expected to perform well in the context of cuts to central bank rates. For example, this can include property securities, which have been under pressure against a backdrop of rising and higher rate environments. 

With this in mind, Alex Watts, fund analystat interactive investor, suggests TR Property Ord (LSE:TRY).

He comments:“As well as potential capital appreciation, income is a key attribute of property investing. Even during periods of market stress, the income return of property has historically comprised a stable and significant portion of the total return. Oftentimes, rents supporting the yield will naturally inflate over time, or may be protected by indexation.

“A fund well suited to access the yields from real estate is TR Property Trust (Super 60), which takes a hybrid approach to pan-European property securities and can allocate 15% to physical property (7% currently). The listed portfolio is diversified across sectors and holds roughly one-third in the UK and two-thirds in Europe. Marcus Phayre-Mudge, has managed the strategy for over 19 years and looks for strong management teams overseeing quality assets and healthy balance sheets. 

“The trust yields circa 4.6%, far surpassing its benchmark, and has an impressive record of growing the distributions year-on-year. The trust will occasionally pay distributions using revenue reserves, though this is prudently managed, and a healthy reserve is maintained to deal with potential earnings shortfalls.

“Given property sector stress in 2022, the trust has a negative return over three years. However, its long-term track record is stellar, returning just under and just over 3% in excess of its benchmark over 10 and 15 years. With REITs having been under a lot of pressure of late, an active and risk-managed approach is a good way to tap into the yield and potential upside for the sector.”

Bonds

Finally, investors might look to invest their cash in short-dated high-quality government and corporate bonds, given the attractive yields offered. Dzmitry Lipski, head of funds research at interactive investor, suggests that the Jupiter Strategic Bond fund could be a good pick.

Dzmitry says: “Jupiter Strategic Bond Fund is 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. The team adopts macroeconomic investing and dynamic asset allocation by focusing on asset allocation, security selection and duration management. 

“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.”

Sam Benstead, fixed income lead at interactive investor, adds another fixed-income pick – ii-rated Royal London Corporate Bond. 

He comments: “Super 60-rated Royal London Corporate Bond has a distribution yield of 5.83%, well ahead of the 2% inflation rate, with income paid out every three months. Bond yields have risen as interest have increased, making now an attractive entry point for income seekers. With rates now falling, and likely to continue doing so, this will drag down yields. However, as falling yields are a result of higher bond prices, investors should see a positive ‘total return’ via income and capital gains from holding this fund. 

“Investors can also look to add gilts to portfolios. One popular option is UNITED KINGDOM 0.125 30/01/2026, with the ticker T26. Maturing in January 2026, it offers an annualised yield to maturity of 3.6%. Trading at £95, most of the return comes from the return of the £100 principal when the bond matures. Given that the bond matures soon, it has a low ‘duration’ and so its price should be relatively stable, and gradually move to its £100 redemption value, which may appeal to investors that want low volatility.”