The latest movement in interest rates caught the market on the hop. I think central bankers should do that more often, in fact. It seems to me that interest rates will continue to be slashed to around 1 per cent, probably within the next three months. They have never been as low as that since the Bank of England was founded in 1694.
Borrowers may be celebrating the idea of interest rates coming down to these levels but those of us with savings will think somewhat differently. If rates do fall as low as 1 per cent, instant access accounts will only be paying around 2 per cent gross. Everyone needs a store of cash that is accessible, so we will just have to accept that there will be a lower return. However, those with excess cash should, as I suggested a while ago, look at gilts and corporate bond funds.
Those investors who feel comfortable with taking on more risk should seriously consider UK equity income funds. Some are now yielding over 6 per cent net. A recession clearly means that there will be some dividend cuts but I believe that the best fund managers will avoid the worst. One such is Karen Robertson, who has run Standard Life’s UK equity high-income fund since 1995.
This is a competitive sector with some of the very best UK fund managers but Robertson has stood out even in this exalted company. She has a long-term track record not only of excellent capital performance but of rising dividends, too. Despite this, she is far less well known than such managers as Neil Woodford at Invesco Perpetual, Adrian Frost at Artemis or Tony Nutt at Jupiter. Her abilities deserve more recognition and, in any case, it is sensible to hold a portfolio or perhaps six or seven equity income funds.
Standard Life Investments has made impressive inroads into the world of investment over the last few years under chief executive Keith Skeogh and head of UK equities David Cumming.
They believe that changes in company expectations drive outperformance and therefore perform analysis to identify change at an early stage. They also use proprietary tools, known internally as the matrix, to follow share price characteristics based on 11 factors. This is in addition to their winners’ list which includes the favourite 20 stock ideas from the UK team among big and medium-sized companies.
A combination of the winners’ list and the matrix has added plenty of value to their stockpicking over the years. Robertson is currently focusing on the sustainability of company earnings and finding those companies that require no debt refinancing.
The portfolio contains 50 stocks, the lowest it has been for some years, which is basically due to the fact that she has moved more into bigger companies. Her portfolio is heavy in defensive areas such as tobaccos and utilities. The biggest holdings include British American Tobacco which is showing price increases and cost savings. Meanwhile, Royal & Sun Alliance is a big beneficiary of the meltdown at US insurer AIG and BP, of course, has a tremendous yield. The fund yields 5.1 per cent at the moment.
Some of you may believe that investing in the stockmarket is totally insane at the moment. I would beg to differ. I firmly believe that good money can be made over the next few years by picking up stock now on the bad days.
In the meantime, a good yield, which will look amazing in the coming months as interest rates are slashed further, makes this fund worthy of a place in any income portfolio.
Mark Dampier is head of research at Hargreaves Lansdown