The funds that have thrived since interest rates started falling

UK funds that focus on value shares or dividend-paying companies have emerged as the winners so far from declines in UK interest rates.

Analysis of UK fund performance by interactive investor has found that those two strategies have been dominant among the top performers since interest rates started to fall from 1 August last year.

In contrast, funds that are more growth focused and try to identify “tomorrow’s winners” – UK smaller company funds – have lagged.

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Our table below shows the top 15 UK equity fund performers during the period when interest rates fell from 5.25% to 4% (1 August 2024 to 23 September 2025), with further cuts expected. The UK fund universe contains around 340 funds.

As our recent feature explains, value investing has experienced a renaissance after more than a decade in the wilderness when interest rates were at rock-bottom levels.

While rates have been falling over the past year or so, the expectation that the UK base rate will remain higher for longer and that the days of ultra-cheap borrowing are over, means that it’s still a favourable backdrop for this style of investing.

Value fund managers seek out companies that appear to be trading at prices lower than their true value, including how much money they make and how much excess cash is generated.

Higher interest rates and concerns over US tariffs have led to a rise in stock market volatility, causing investors to dial down on risk. As a result, the market direction has switched, with investors becoming more mindful of valuations and prioritising companies making money today and paying dividends.

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US technology stocks have proven an exception to the rule. Such companies, which fit into the quality growth bucket, have enjoyed a strong run as interest rates fell in the UK and across the pond. Tech stock strength has also largely been driven by excitement over the potential of artificial intelligence (AI). Another factor at play was the sell-off the sector experienced earlier this year, along with the wider market, in response to tariffs which gave investors the chance to take advantage of declines in shares prices and lower valuations.

Most funds with “value” or “recovery” in their name invest in value shares, while some “special situations” funds also follow the value approach. For example, our table includes Redwheel UK Value, Ninety One UK Special Situations, Dimensional UK Value, and M&G Recovery. However, that’s not to say that funds without those terms in their name can’t have a value bias. 

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Dividend strategies have also performed well since rates started falling. This is due to the switch in market direction to companies making profits today, rather than those promising growth. This trend has hurt UK smaller company funds, which invest in less-mature firms that are higher risk, but have greater return potential due to their size.

Falling bond yields is another key driver for dividend strategies, as Dzmitry Lipski, head of funds research at interactive investor, says in his latest article: “Another important consequence of lower rates is the relative attractiveness of equities versus bonds.

“As bond yields decline, investors often shift towards equities in search of income and growth. Dividend-focused strategies become especially appealing in this environment, as they can replace some of the lesser income from bonds while offering resilience in volatile markets.”

As Lipski notes, companies with long track records of paying and growing dividends have historically shown lower volatility than non-dividend payers. In turn, this helps cushion portfolios during downturns.

In our table, examples of funds with an income focus include: TM Redwheel UK Equity Income, Barclays UK Equity Income, Vanguard FTSE UK Equity Income Index, iShares UK Dividend ETF (LSE:IUKD), Jupiter UK Income, and Schroder Income.

Our recent article on Vanguard FTSE UK Equity Income Index explained why this tracker fund has outperformed most UK fund managers over multiple time periods. 

UK smaller company funds have lagged. As our table shows, the average fund in the sector has lost -2.5% since last August. In contrast, the average UK equity income and UK all companies fund has gained 8.7% and 7.5%. Smaller company shares are more domestically focused than the mega-caps in the FTSE 100 index. It appears investors’ lack of risk appetite is negatively impacting this area of the market, despite there being plenty of potential performance catch-up with larger company shares.  

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Among investment trusts, the same trend has played out. Since 1 August 2024, the average UK smaller company trust is up 1.3%, while the average performer in the UK equity income and UK all companies’ sectors is up 10% and 9.2%.

Value-focused funds, including Temple Bar (LSE:TMPL) and Fidelity Special Values (LSE:FSV), are among the top performers, up 32.1% and 20.2% in share price total return terms.

Dividend-paying strategies also top the performance ranking, with Aberdeen Equity Income Trust (LSE:AEI), Shires Income (LSE:SHRS), City of London (LSE:CTY), and Diverse Income Trust (LSE:DIVI), all returning around 18% to 19%.

Source: FE Analytics. Data from 1 August 2024 to 23 September 2025. Past performance is not a guide to future performance.