/ GEARING & DISCOUNTS /
Daniel Lockyer , co-manager of the Hawksmoor Vanbrugh and Hawksmoor Distribution funds , says long term structures for gearing – called debentures – are much more difficult to manage as they are fixed . This means the trust is permanently geared and the manager needs to offset any debt with bonds or other “ dampening ” assets in order to change the nature of the overall return profile if they are feeling nervous .
“ As most of these debentures were issued when interest rates were high and feared to be going higher , they are now very expensive to repay ,” says Lockyer . “ Remember , it is the investment trust ’ s board that decides on gearing and usually the manager has to seek permission to employ or increase it .”
STRENGTH OF CONVICTION Gavin Haynes , managing director of Whitechurch Securities , says gearing can also provide a more indirect and abstract pointer of an investment opportunity in the market : the strength of a manager ’ s conviction .
“ The level of gearing can give an indication of the underlying fund manager ’ s view on the prospects of a certain area . If employed correctly , it can be an excellent way to enhance longterm share price performance ,” he adds .
A quick thought experiment . If you were bullish on the prospects for a basket of stocks to rise by an average of 15 per cent in the next 12 months , would you borrow at 7.5 per cent over the same period to increase your investment in them ?
If the answer is yes , can you be sure it is high-conviction , not recklessness ? If the answer is no , why invest in the stocks at all ?
DISCOUNTS A second strategy to supersize investment trust returns is to buy one of these vehicles when they are trading on a discount .
This means that the share price , multiplied by the number of shares in existence , would be a lower number than the overall value of the portfolio ’ s underlying securities if they were sold at market value and any debts from gearing were paid off .
Discounts tend to vary over time and can move to premiums
MOST GEARED TRUSTS IN AIC UNIVERSE
Company |
AIC sector |
Discount / premium (%) |
Gearing (%) |
British & American |
UK Equity Income |
+ 53.1 |
110 |
MedicX |
Property Specialist |
+ 55.3 |
111 |
DP Aircraft |
Sector Specialist : Leasing |
+ 7.2 |
137 |
Aseana Properties |
Property Direct - Asia Pacific |
-22.3 |
139 |
JPMorgan Income & Capital |
UK Equity Income |
-15.4 |
140 |
Source : The AIC
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