UK funds sector review – when will interest rates be cut?

Through 2024, UK gross domestic product (GDP) is expected to grow 0.5%, with falling inflation expecting to offer support to real incomes.

Inflation came in at 3.4% in February, the lowest rate since September 2021, but still higher than the Bank of England’s (BoE) 2% target.

When are interest rates likely to fall?

In March, the BoE chose to hold interest rates steady at 5.25% – a 16-year high. However, what really caught investor’s attention were comments from the BoE’s Governor Andrew Bailey.

The BoE expects inflation to fall below 2% in the coming months, and the market’s expecting three rate cuts of 0.25% before 2024 is out.

Whether that happens will depend on how sticky the BoE thinks inflation will be in a few key areas. One area to keep a close eye on is in service prices, which are still elevated at 6.1%

What’s grabbing the attention of UK fund managers?

Our recent meetings with fund managers investing in the UK have unearthed some interesting insights.

The dominant theme has been around the material boost that share buybacks are giving to the total shareholder yield. This total includes the dividend a company pays out and the shares it buys back. The UK market currently offers the highest total shareholder yield globally at 6.1%.

Through 2023, nearly 40% of FTSE 100 companies bought back their own shares. If this carries on, share buybacks on this scale are likely to have more than a marginal impact on shareholder returns.

Looking ahead to the rest of 2024, headline market dividends are forecast to rise 3.7% for the full year to £93.9bn, though this is still lower than the £100bn figure pre-pandemic.

We think the combination of attractive and growing dividends, significant share buybacks and the discount the UK market is still trading on makes it an attractive time to invest.

Remember though, yields are variable and no shareholder returns are ever guaranteed. All investments and any income from them rise and fall in value, so you could get back less than you invest. Past performance also isn’t a guide to the future.

This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice.

How have the UK Wealth Shortlist funds performed?

Our Wealth Shortlist selections delivered mixed performance over the past year, and we tend to expect this from such a wide range of funds.

Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives align with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.

For more details on each fund and its risks, see the links to their factsheets and key investor information.

The best performing fund in the UK Growth section of the Wealth Shortlist over the last year was the Aegon Ethical Equity fund with a 14.28%* gain.

The fund is managed by the experienced Audrey Ryan and appears in the Responsible section of the Wealth Shortlist. This is because of its exclusions-based approach – it avoids investing in companies involved in activities deemed unethical.

This approach means we expect it to perform differently to the broader UK stock market, and its peers in the IA UK All Companies sector.

Ninety One UK Sustainable Equity was the weakest performer of our UK Growth Wealth Shortlist selections. The fund delivered a return of 3.55%, behind both the FTSE All-Share index and the IA UK All Companies sector average.

The fund invests in companies the manager thinks are making a positive impact on society or the environment. Its positive impact approach makes it different to other funds in the IA UK All Companies sector, and to other responsible UK equity funds.

The best performing fund of our UK Equity Income selections over the last year was Artemis Income.

We think the experienced trio of Nick Shenton, Andy Marsh and industry stalwart Adrian Frost are one of the best in the business with a combined 70 years investment experience.

At the time of writing, the fund yields 3.90%. The fund takes charges from capital, which can increase the yield, but reduce the potential for capital growth.

The worst performing of our UK Equity Income fund selections was Troy Trojan Income, which lagged the FTSE All-Share return by 3.04% over the last year.

We think the fund, managed by Blake Hutchins, invests in companies that aren’t as reliant on a strong economy to thrive. So, we expect the fund to hold up better than the index in falling markets, but lose ground in a rising market.

The strongest performer in the UK Small and Medium-sized section of the Wealth Shortlist over the past year was the FTF Martin Currie UK Mid Cap fund.

Managed by Richard Bullas, the fund rose by 9.95%*, but still narrowly lagged the FTSE 250 ex IT index by 0.10%.

The managers invest in medium-sized companies within the FTSE 250, often considered the ‘sweet spot’ between company growth potential and maturity. The fund also invests in smaller companies, which does add risk.

Our weakest fund selection in this sector over the last year was the WS Amati UK Smaller Companies fund. The fund fell by 1.08%, disappointingly lagging behind the FTSE Small Cap ex Investment Trust index and the IA UK Smaller Companies peer group.

The fund is run by an experienced and well-resourced team and aims to invest in companies they think can grow faster than their competitors. The fund invests in smaller companies, which adds risk.