Hunting for income amongst rate cuts

Interest rates are expected to start being cut over the coming months – as long as inflation doesn’t spring any nasty surprises. The Bank of England increased the base rate 14 times between December 2021 and August 2023* to combat the rising cost of living. And it seems to be working. The rate of inflation has dropped from a 41 year high of 11.1% in October 2022 to 3.2% in March 2024**. This isn’t too far off the Bank’s 2% target.

Many economists now expect the base rate, which has remained stable at 5.25% for the past eight months***, to be cut once – possibly even twice – during 2024. But while this would be welcome news for borrowers – especially those on variable rate mortgage deals – it may mean savers having to find alternative income sources.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and, if you are unsure of anything please contact an expert adviser.

Alternatives to holding cash

The best savings rates on offer from banks and building societies have already dropped from 6% last November to around 5%. Base rate cuts will see them fall further. One option for savers and investors is putting their money into equity income funds. These portfolios aim to achieve a rising income, as well as growing investors’ capital. The income generated by individual funds can be paid out to investors or reinvested into the fund to help enhance its future growth potential.

This makes them attractive to income investors wanting an extra source of revenue to help pay the monthly bills – or those more focused on their future needs. Managers in equity income sectors often favour companies that have a history of paying a share of their profits – known as dividends – to their investors.

Dividend prospects around the world

The good news is that global dividends have been on the increase. In fact, they rose 5% to a record $1.66 trillion in 2023, according to the Janus Henderson Global Dividend Index****. The report revealed that 22 countries saw record payouts, including the US, France, Germany, Italy, Canada, Mexico and Indonesia****. Unsurprisingly, the US made the largest contribution to 2023’s higher dividends, owing to its large weighting in global markets. Meanwhile, Europe was described in the study as a “key engine of growth”, with record payouts up by 10.4% year-on-year, on an underlying basis****.

Where to find equity income funds

Two of the most popular sectors for portfolios specialising in this area are IA UK Equity Income and IA Global Equity Income.

The IA UK Equity Income sector is the 10th most popular with UK investors, who currently have £35.6bn invested in this area^. The IA Global Equity Income sector, meanwhile, has attracted £23.8bn of investors’ money^. As its name suggests, it has a broader geographical focus.

There’s no shortage of funds in either sector, while many are run by very experienced managers with impressive track records of performance. So, where do you start?

Here we highlight four interesting equity income funds that are definitely worth considering.

Janus Henderson UK Responsible Income

This fund aims to provide an income – with the potential for capital growth – over the long term, which is defined as being at least five years. We like the extensive equity income experience of its manager, Andrew Jones, who uses screens to help filter the investment universe. The fund has a bias towards mid-cap stocks, although its largest holdings currently include household names such as AstraZeneca, GSK and NatWest Group^^. Andrew, who has run the fund since 2005, looks for a balance of growth, as well as an attractive income. For investors wanting a sustainable yield, therefore, we believe this could be a great option.

IFSL Marlborough Multi Cap Income

This fund takes an interesting approach: it ventures into the small-cap space, which is an area where many income funds tend to avoid. In fact, almost half of the portfolio is in such businesses. Companies with market capitalisations of £250m to £1bn account for 27% of the portfolio, while a further fifth of the fund is in those with valuations of less than £250m^^^. We like the fact its well-structured and highly experienced team continue to take advantage of opportunities in the small cap arena. While the portfolio is primarily constructed on a bottom-up, stock picking basis, top down drivers will also have an influence. Value and growth holdings are combined to meet the yield objective.

Fidelity Global Dividend

Our next suggestion is a core global income fund that invests in companies that offer a healthy and sustainable dividend yield. This fund aims to pay a regular and growing income, while also preserving capital. It also has an unconstrained approach in terms of where it can invest. Dan Roberts has been managing the fund since its launch in January 2012. We like how he challenges his analysts and encourages intellectual debate. Overall, we believe the Fidelity Global Dividend fund is a well-diversified, lower risk portfolio that may suit investors seeking a stable, and potentially rising, global income.

JPM Global Equity Income

This is another core equity income fund with a global approach. This means it can invest across the world, including the emerging markets. Its managers – Helge Skibeli, Sam Witherow and Michael Rossi – use a combination of their industry experience and the talents of an international team of analysts. We like how they pay close attention to risk, while their focus on dividend growth should give investors a growing income stream. According to its most recent factsheet, the fund is invested in global giants such as Microsoft, UnitedHealth, Exxon Mobil, Coco-Cola and LVMH^^.

*Source: The Times, 9 May 2024
**Source: The House of Commons Library, April 2024
***Source: Bank of England, May 2024
****Source: Janus Henderson Global Dividend Index, March 2024
^Source: Investment Association, March 2024
^^Source: fund factsheet, 30 April 2024
^^^Source: fund factsheet, 1 May 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 22/05/2024