UK interest rates have fallen for the first time in four years in welcome news for homeowners and small businesses. But what about investors?

The Bank of England's Monetary Policy Committee (MPC) voted 5-4 in favour of reducing the bank rate by 0.25 percentage points on 1 August. Four members preferred to maintain the rate at 5.25% and governor Andrew Bailey had the decisive vote.

The BoE said it intends to reduce rates only gradually from here. But with markets expecting Threadneedle Street to do so once more before the end of the year, investors may be wondering where to turn when it comes to their next investment choices amid lower rates.

Falling interest rates typically boost bond prices, as the cost of borrowing decreases. However, there is variety of potential picks across equities, funds, investment trusts, and bonds.

Here are some top picks for investors to maximise their portfolio amid falling rates.

Equities: High-yield opportunities

British American Tobacco (BATS.L) and HSBC (HSBA.L)

Richard Hunter, head of markets at Interactive Investor, highlights British American Tobacco and HSBC as standout stocks. He notes that while the FTSE 100 yields an average of 3.7%, investors should consider more than just dividend yield when making decisions. A high yield might be misleading, especially if it's driven by a declining share price. For instance, Vodafone's (VOD.L) 11.1% yield masks its 6% share price drop over the past year.

Hunter suggests focusing on stocks with strong dividend cover – ideally above 1.5 – to ensure dividends are sustainable.

“Overcoming these hurdles – a high yield, adequate cover, an acceptable share price performance and a positive market consensus on prospects, two stocks emerge – British American Tobacco and HSBC,” he said.

Funds: Diversified strategies for consistent returns

Artemis Income Fund (0P00000FHZ.L)

Artemis Income Fund emerges as a top pick for those seeking steady income and long-term growth. The fund focuses on UK large-cap stocks with a "cash flow first, dividends second" approach. Over the past year, it has maintained a yield of 3.5%, supported by a strategy that prioritises companies with strong cash flows.

Tom Bigley, fund analyst at Interactive Investor, said: “The strategy benefits from a highly experienced team that has consistently applied a sensible, tried-and-tested approach, which has seen the fund become one of the most highly regarded in the sector.

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“Management has a clear mantra of 'cash flow first and dividends second'. In short, they prefer to hold companies that can consistently generate strong cash flows, which is key to fuelling the dividend that shareholders receive.”

TR Property Trust (TRY.L)

For property exposure, TR Property Trust offers a hybrid approach to pan-European real estate, combining listed securities with a 15% allocation to physical properties. Despite recent sector stress, the trust has a strong long-term track record, with a yield of 4.6% and a history of consistent distribution growth.

Alex Watts, fund analyst at Interactive Investor, said: “TRY will occasionally pay distributions using revenue reserves, though this is prudently managed, and a healthy reserve is maintained to deal with potential earnings shortfalls. Given property sector stress in 2022, the trust has a negative return over three years.

“However, TRY’s long-term track record is stellar, returning just under and just over 3% in excess of its benchmark over 10 and 15 years. With REITs [real estate investment trusts] having been under a lot of pressure of recent, an active and risk-managed approach is a good way to tap into the yield and potential upside for the sector.”

FTF Royce US Smaller Companies (0P0001PP1Y.L)

The HL senior analyst said for those interested in smaller companies, FTF Royce US Smaller Companies presents a unique opportunity.

Smaller companies often struggle in a rising rate environment due to higher borrowing costs and economic sensitivity. However, as rates decline, these companies may see improved growth prospects, making them an interesting investment choice. While riskier than larger companies, Hal Cook, senior investment analyst at Hargreaves Lansdown, said this fund is well-positioned to capitalise on the benefits of lower rates.

Baillie Gifford Sustainable Income (0P0001J8P3.L)

For cautious investors, multi-asset funds like Baillie Gifford Sustainable Income offer a balanced approach, according to HL’s Cook. This fund invests across infrastructure, property, bonds, and equities, providing diversification that can help navigate different market conditions.

While the fund invests in higher-risk assets like emerging markets and high-yield bonds, its diversified portfolio and focus on sustainability make it a compelling option in a low-rate environment.

First Sentier Global Listed Infrastructure (FLIIX)

Fidelity’s International Richard Evans said another fund to consider is First Sentier Global Listed Infrastructure, which focuses on infrastructure investments—a sector that could recover as interest rates fall.

The fund’s yield of 3.1% may not seem highly competitive against current cash rates, but it offers the potential for long-term growth as rates decline. This fund avoids liquidity issues by investing in shares of listed infrastructure companies rather than physical assets, providing both stability and upside potential.

Bonds: Tactical plays for a rate-cutting cycle

Invesco Tactical Bond (0P0000XBQQ.L)

As interest rates decline, bonds become increasingly attractive. Invesco Tactical Bond is well-positioned to capitalise on this trend, with a duration of 7.9 years, indicating high sensitivity to rate changes, according to Cook, of HL. While the fund invests in high-yield bonds, adding risk, its strategic adjustments aim to benefit from the current rate environment.

Jupiter Strategic Bond Fund (0P0001JWIE.L)

Jupiter Strategic Bond Fund is a "go-anywhere" fund, meaning it has the flexibility to seek out the best opportunities across the global fixed-income market. This fund focuses on dynamic asset allocation and downside risk management. With over 60% of its portfolio in corporate bonds and 20% in government bonds, the fund currently yields over 4%, making it an appealing choice for those seeking a balanced, income-focused investment.

Dzmitry Lipski, head of funds research at Interactive Investor, said: “The fund has shown strong performance and resilience over the long term and provides an attractive yield. Given the fund’s flexibility and focus on downside protection, this makes it a strong core option for investors within a well-diversified portfolio.”

Royal London Corporate Bond (0P0000YQN5.L)

Another bond option is the Royal London Corporate Bond fund, which offers a distribution yield of 5.83%. This fund pays income quarterly and is well-suited for income seekers, particularly as bond yields have risen in response to higher interest rates. With rates now expected to fall, this fund offers the potential for capital gains as bond prices rise, making it a solid addition to a diversified portfolio.

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Sam Benstead, fixed income lead at Interactive Investor, said: “Super 60-rated Royal London Corporate Bond has a distribution yield of 5.83%, well ahead of the 2% inflation rate, with income paid out every three months. Bond yields have risen as interest have increased, making now an attractive entry point for income seekers.

Savings: Locking in high returns

While savers can currently earn more than 5% interest on their money, this opportunity may not last as interest rates fall. Fixed-rate accounts offer a way to lock in these higher returns and protect against potential rate cuts by savings providers.

Alice Haine, personal finance analyst at Bestinvest, advises savers to act quickly to secure the best deals. “With top savings accounts still offering over 5%, now is the time to lock in these rates before they start to decrease,” she said.

For those with money in easy-access accounts, switching to a fixed-rate account could be a prudent move to preserve returns.

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