The Monetary Policy Committee’s (MPC) decision yesterday to keep interest rates at 0.5 per cent initially shocked equity, bond and currency markets, which was understandable given there was an 80 per cent chance priced in that rates would be slashed to 0.25 per cent to limit the negative impact Brexit is likely to have on the UK economy.
While a continuation of current monetary policy (the MPC opted against further quantitative easing as well) was a surprise, the bigger shock was that Mark Carney and the Bank of England were prepared to go against market expectations.
The reasons behind the MPC’s decision include a more stable political backdrop and limited economic data surrounding the impact of the EU referendum result. However, the FTSE 100 is now 1.5 per cent down from its peak yesterday as investors have clearly used the announcement to take risk of the table.
Performance of FTSE 100 yesterday
Source: Google Finance
The consensual view, though, is that rates will be cut (and QE maybe reintroduced) at the next MPC meeting in August – which is only going to add to the huge uncertainty surrounding the UK and the limbo-like state of domestic assets. 
“The outlook for interest rates are still towards a further cut, possibly as soon as August, as early indicators point to weakening consumer and business confidence and a significant slowdown in activity in the housing market,” Adrian Lowcock, head of investing at AXA Wealth, said.
“In the meantime savers continue to suffer from record low interest rates and will do so for some time to come. Things are likely to get worse for savers with inflation expected to return as the recent rise in oil prices, but more importantly the fall in the pound drives up prices eroding the value of cash.”
“Inflation is insidious as it slowly erodes the spending power of savings and since interest rates were cut to 0.5 per cent in March 2009, an average cash account has already lagged inflation by over 11 per cent.”
As such, Lowcock (pictured) says the hunt for income – a trend that has dominated the market since the global financial crisis – is only going to intensify over the short to medium term. In this article, he highlights three equity income funds (which can hopefully produce dividend growth ahead of inflation) that he thinks investors should consider for their portfolios.
MI Chelverton UK Equity Income
Though UK smaller companies have borne the brunt of the Brexit-induced uncertainty, Lowcock say the five crown-rated MI Chelverton UK Equity Income fund is a decent option for investors who want capital and income growth.
Some 70 per cent of the stocks in the fund – which is managed by David Taylor and David Horner –have a market cap below £1bn.
Not only has the focus on smaller companies, along with the managers’ bottom-up approach, meant MI Chelverton UK Equity Income has been top decile performer in the IA UK Equity Income sector over five years, it has also led to a strong income track record.
The managers aim to produce a yield of 4 per cent and FE data shows it has been among the top five income-producing portfolios in the peer group since its launch in December 2006. Investors who bought £10,000 worth of units in the fund at launch would have since earned £3,993 in income – plus the managers have a good track record of growing the dividend since the global financial crisis.
MI Chelverton UK Equity Income’s dividend history
Source: FE Analytics *Figures based on a £10,000 investment in an 2007
“The managers have established a good track record within the small-cap universe and stock picking is an important part of the investment strategy,” Lowcock said.
“There is a strong emphasis on business and balance sheet strength and focus on stable earnings and a high cash flow. The fund offers investors access to UK’s smaller companies and its income focus means it should be less volatile than a typical small-cap growth fund.”
The fund, which has a clean ongoing charges figure of 0.92 per cent, currently yields 4.24 per cent – which is above average for the peer group.
Given the numerous unknowns relating to the future of UK equites, Lowcock says now is an ideal time to consider global equity income funds within their portfolio. One of his favourites in the space is the £4.6bn Newton Global Income fund thanks to its focus on capital preservation.
“Manager Nick Clay runs the fund with a focus on defensive companies which are well financed. This is in line with Newton’s views that the world is heavily indebted and will need to reduce this debt at some point,” Lowcock said.
“As a result of the fund is invested in global pharmaceuticals and consumer goods companies. Clay runs a concentrated portfolio of 50-70 stocks with a bias toward large companies. There is minimum yield requirement and Clay can only invest in companies which yield 25 per cent more than the FTSE World index.”
Clay took over the portfolio from James Harries in December 2015, but runs the portfolio in much the same way as his predecessor by using Newton’s thematic approach and a clear focus on capital preservation.
The fund has not only been the best performing portfolio in the IA Global Equity Income sector over one, five and 10 years, but also has the lowest maximum drawdown and highest risk-adjusted returns over the past decade.
Newton Global Income has also paid out more in total dividends than its average peer over the longer term, though its actual dividend growth has been lacklustre over recent years as the fund has become more defensive.
Newton Global Income’s dividend history
Source: FE Analytics *Figures based on a £10,000 investment in an 2006
Indeed, its exposure to so-called ‘expensive defensive’ high quality stocks has left the fund with a yield of just 2.91 per cent today. Newton Global Income has an OCF of 0.79 per cent.
Asian and global emerging market equities have been among the big winner from the Brexit fallout and Lowcock says there is a compelling income story within the developing world.
As such, he rates the £780m Schroder Asian Income fund given its experienced manager and its value tilt – which leads it to a higher yield and well placed to take advantage of an extended bull run in Asia following years of disappointing returns.
“Richard Sennitt is a very experienced manager and has been investing in Asia for over 21 years,” Lowcock said.
“He has a strong value discipline and won’t buy at any price, paying attention to dividend yield versus price. He is a stock picker and runs a concentrated portfolio of 60-80 stocks and does so on an unconstrained basis. The fund invests in companies which are financially sound, profitable, with proven management focused on shareholder returns.”
“The income focus should help protect investors’ capital in volatile markets.”
The four-crown rated Schroder Asian Income has outperformed both the IA Asia Pacific ex Japan sector and its MSCI Pacific ex Japan benchmark over one, three, five and 10-year periods.
It has been a good income fund in many respects as well, given it has tended to protect capital in falling markets more effectively than its average peer, has been one of the best in the sector for absolute income pay-outs and Sennitt has only had to cut his dividend once over the past 10 years.
Schroder Asian Income’s dividend history
Source: FE Analytics *Figures based on a £10,000 investment in an 2006
Currently, Schroder Asian Income has a yield of 3.69 per cent while its OCF is 0.93 per cent.