SVM UK Opportunities, MFM Slater Growth and Fidelity UK Smaller Companies are among some of the funds that delivered stellar returns both one and three years after interest rates were cut and QE was announced in the UK in March 2009, according to data from FE Analytics.
Outside of equities, Unicorn Mastertrust and Investec Managed Growth fared well in the multi-asset space while Invesco Perpetual High Yield and Old Mutual Monthly Income Bond outshone their peers within the sterling-denominated bond sectors.
Feathers were rustled last Thursday when Bank of England governor Mark Carney announced that, alongside halving interest rates to 0.25 per cent, the central bank will expand its quantitative easing programme and introduce a £10bn investment-grade corporate bond-buying scheme. On top of this, the BoE is to introduce a Term Funding Scheme to encourage banks to lend money while interest rates are low.
Such loosening of monetary policy hasn’t been seen in the UK since March 2009 when interest rates were lowered to 0.5 per cent and QE was first introduced.
Given the significant changes that were announced last Thursday, we took a look at the UK funds within the Investment Association universe delivered the best total returns both one and three years after the loosening of monetary policy in 2009 as a point of interest (of course, the investment landscape is very different more than seven years on).
In the UK equity space, there were six funds out of 321 that made it onto the top 10 list for their total returns over both one and three years after interest rates were cut.
Neil Veitch’s SVM UK Opportunities fund came out on top over one year and in fourth place over three years, while Standard Life Investments UK Equity Unconstrained fell into first place over three years and in second place over one.
UK equity funds with strongest performance after rate cut over 1 and 3yrs
Source: FE Analytics
All six funds on the list were growth-orientated and are renowned for both straying away from their benchmarks and holding more contrarian value names – other funds on the list include Cavendish Opportunities and Standard Life Investments UK Equity High Alpha.
Over in the multi-asset space, Andrew Harwood’s CCM CFS Balanced Opportunities fund came in first for its total return over one year and fell into sixth place over three years while Peter Walls’ open-ended fund of trusts Unicorn Mastertrust achieved the highest returns over three years and the third-highest returns over one.
Multi-asset funds with strongest performance after rate cut over 1 and 3yrs
Source: FE Analytics
Finally, within the sterling-denominated bond sectors, high yield came out on top as investors searched for yield while interest rates plummeted. Marlborough High Yield Fixed Interest was the top performer over one and three years while Invesco Perpetual High Yield came in second place over the same time frames.
Other high yield bond funds that fared well include Newton Global High Yield Bond, Kames High Yield Bond and Baillie Gifford High Yield Bond.
Sterling bond funds with strongest performance after rate cut over and 3yrs
Source: FE Analytics
Given that loose monetary policy has been implemented again though, it doesn’t necessarily mean that these funds are set to outperform their peers, given the significant change in the investing landscape over the last few years.
For instance, many investors worry that central bank policy has now become fatigued and is less efficient than it once was. 
For Hawksmoor’s Daniel Lockyer (pictured), he says that this is the key reason why he believes the right investing strategy today may not be the same as it was in 2009.
“In 2009 asset prices were generally cheap, but most risk assets today are already richly priced - whether it is record low bond yields, equity markets (particularly ‘bond proxies’) or property, arguably because QE inflated the values of assets principally by lowering the ‘risk-free’ rate, rather than boosting the real economy,” he explained.
“Even if this round of QE is successful, there is a limit to how low the yields go in certain equities, government bonds, corporate bonds, infrastructure etc. There is no simple single strategy today as we have no historical precedent to refer to and there are very few areas of the market which are demonstrably cheap and offer a margin of safety.”
“Also there are very few uncorrelated assets or safe havens where capital is not at risk – a reason why so many macro absolute return funds are struggling to meet their objectives.”
Given this backdrop, the senior fund manager believes there are a few strategies investors can use to deal with today’s economic uncertainty.
Firstly, he argues that gold equities are “the ultimate hedge against central bank incompetence” and says they will store value if inflation does finally appear as a result of prolonged ultra-loose monetary policy.
Another option he gives is increasing exposure to structural and secular growth themes which can be found in areas of the market such as biotech, small and micro-caps, private equity and emerging and frontier markets.
“Third, diversify currency exposure given there are good reasons why all the major currencies should be weaker going forward, and incorporate Asian and EM currencies. Fourth, a focus on funds run by managers who share our philosophy that the best way to contain risk is to avoid the permanent loss of capital,” he added.
Jason Hollands, managing director at Tilney Bestinvest, agrees that today’s environment is very different from when QE was first implemented and points out the issue in 2009 was the solvency of the banking system and the drying up in the supply of credit.
Now, he says the concern is the impact on business and consider confidence caused by near-term uncertainties created by the process of extricating the UK from the European Union.
“Credit has hardly been in short supply with very low interest rates and bond yields prior to the latest round of easing. Arguably a more suitable response to Brexit would have been a fiscal one – for example cutting VAT to boost consumer spending or slashing corporation tax to affirm that post-Brexit Britain is a great place to base a business,” he said.
“While monetary easing is aimed at supporting the real economy, much of this additional liquidity will find its way into the financial markets, further inflating risk assets as investors search for yield so the latest round of easing should support both UK corporate bonds and equities in the near term. However, I do think that with each successive dose of monetary stimulus the effects are weaker.”
Hollands adds that further QE has contributed to the weakening of the pound which will in turn flatter sterling-reported profits and the dividends of global-facing companies. As such, he says that investors should focus on funds that hold large, international businesses with strong levels of free cash flow.
He also says that managers with minimal exposure to highly cyclical stocks could be set to do well in today’s market environment.
“A key risk is that these measures ultimately prove ineffective and that another round of monetary stimulus measures across the globe sees a loss of confidence in central banks,” the managing director warned.
“That’s the case for holding exposure to physical gold, for example via ETFS Physical Gold as an insurance policy against such a scenario. With bonds yields on their knees, the opportunity cost for holding a zero yield asset like gold is now very low.”
In an upcoming article, FE Trustnet will highlight the fund investment professionals are buying to navigate their portfolios through looser monetary policy
