Five fund tips for a 0.25% interest rate environment

Written by: Tom Stevenson
With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are five funds for a ‘lower forever’ interest rate environment.

With cash in the bank continuing to offer so little in an era of persistently low interest rates, savers and investors face an ongoing headache when it comes to finding a sustainable source of income. To compound the problem, the environment for income seekers is only likely to get more challenging following predictions that rates are going to head further south. So where should investors look for yield?

Here are five income–focused funds which I like the look of that could help investors achieve a safe and reliable source of income in this challenging landscape.

Fidelity Global Dividend Fund

This fund is managed by Dan Roberts, who says he runs the fund “like I run my own money”. Roberts invests in stocks where there is a good margin of safety, providing a degree of capital protection in volatile markets. He aims to deliver a combination of strong long-term returns with lower volatility than the broader market and income growth ahead of inflation.

M&G Optimal Income Fund

Managing the fund since its launch in 2006, Richard Woolnough seeks to provide investors with total returns through exposure to the best income stream possible. The flexible nature of the fund allows the manager to scour the whole fixed income space and beyond, meaning he is able to find income opportunities that sit in government bonds, investment grade bonds, high yield bonds, and even sometimes in equities.

Invesco Perpetual European Equity Income Fund

Managed by Stephanie Butcher, the fund 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.

JPM US Equity Income Fund

Clare Hart, the manager of the fund, seeks to build a portfolio of high yielding US companies and her fund might best be seen as a traditional growth and income fund. The manager has a strong focus on the companies’ pay-out ratios (dividends as a proportion of earnings) and not just the company’s dividend yield – a low pay-out ratio indicates a disciplined use of capital by management. As Hart puts it, “dividends are important, but so is the ability to pay the dividend…quality matters.”

Fidelity MoneyBuilder Income

Managers Ian Spreadbury and Sajiv Vaid bring with them a wealth of experience on this fund. Veteran investor Spreadbury has spent over 30 years in fund management, the last 20 of which have been at Fidelity. The managers aim to achieve an attractive level of income from a portfolio primarily invested in sterling-denominated (or hedged back to sterling) fixed interest securities. They have the freedom to invest outside the fund’s principal geographies, market sectors, industries or asset classes and investments may be made in currencies other than the fund’s denominated currency.

Tom Stevenson is investment director for Personal Investing at Fidelity International

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