A gift from the Fed

The US Federal Reserve is doing its best to help investors out. The Fed’s announcement last week of an interest rate cut was broadly expected, but its decision to go for a full 0.5 percentage point reduction was bolder than many economists anticipated. That decisive shift towards looser monetary policy provides a more supportive backdrop for stock market investors, particularly since other central banks and policymakers are in similar mode.

Where, though, to take advantage? Several sectors should benefit. Generally speaking, lower interest rates tend to be good news for growth stocks, which are priced according to what their earnings might be in the future and what that means today. Technology companies are the classic example of growth stocks, so investment trusts that own these businesses are well-placed to benefit from lower rates. Several funds in the Global sector, for example, have significant technology sector holdings.

Income-oriented funds also tend to get a boost from interest rate cuts, as investors look for alternative sources of yield away from fixed income and deposit accounts. Here, equity income investment trusts – both UK and Global – have particular advantages; investment trusts are unique amongst collective funds in having the option of retaining some dividends in strong years in order to support distributions in weaker times, effectively smoothing out the income stream.

It's also worth considering asset classes that tend to move up and down in line with bond yields, which are closely linked to interest rates. Infrastructure is one good example. And again, investment trusts provide a route into the sector for retail investors, providing liquidity in an asset class that can otherwise be hard to get in and out of.

Real-estate investment trusts also reap the liquidity benefits that investment trusts can offer. And interest rate cuts should be supportive for many types of property investments There are several different types of property trusts which you can browse in different sectors here.

Smaller companies could be another interesting opportunity. In the US, small-cap stocks have a long history of generally outperforming large companies following interest rate cuts. That reflects their greater exposure to external financing costs, which drop when rates come down. On those grounds, the North American Smaller Companies investment trust sector could be a happy hunting ground just now – or consider a more generalist North American trust with a weighting towards the smaller end of the market.

The good news is that most funds in these sectors are only just beginning to adjust to the shifting economic picture. Investment trusts have faced multiple challenges over the past couple of years, with shares in many funds currently trading at significant discounts to the value of their underlying assets. Sentiment takes time to shift, even when the prevailing market winds change direction.

For investors, therefore, a window of opportunity is currently ajar. Funds in multiple sectors of the investment trust sector stand to benefit from falling interest rates and fairer regulatory treatment. And current valuations provide the potential to get exposure to that benefit on the cheap. As always, your individual investment decisions should be based on your own circumstances and attitude to risk, but we may finally be on the edge of a reversal of fortunes for many funds.