Trust managers head for record-low levels of gearing

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Trust managers head for record-low levels of gearing

Investment trust managers are holding ever-decreasing levels of debt, data from the Association of Investment Companies has revealed.

According to the figures, net gearing across the Association of Investment Companies (AIC) members, excluding venture capital trusts, has been falling steadily since 2009.

The highest net level of gearing, 14 times, was recorded in February 2009, a month before the Bank of England reduced the bank base rate to 0.5 per cent.

However, the average gearing on AIC member investment trusts is now at five times, with some individual trusts running at two times or even zero levels of debt.

Trusts have been hovering at the five times level every month since October 2017, AIC data showed.

Borrowing to invest - known as gearing in the investment trust industry - was very popular in the run-up to the 2007 to 2008 financial crisis.

I predict levels of gearing may reduce further. Peter Walls

At the time, fund managers using high levels of gearing on their trusts explained debt was cheap and therefore it was reasonable to load debt onto the trust in order to generate high levels of returns on their underlying investments, without having to worry too much about the repayments.

The financial crisis put paid to this idea, and since then, investment trust managers have been exceptionally cautious,  keeping low levels, according to Peter Walls, manager of the £76m Unicorn Mastertrust - a fund of investment trusts.

Mr Walls, who tries to keep gearing contained across the portfolio, told Financial Adviser he approved of this greater level of caution among investment trust managers, even though debt seems cheap once again thanks to low levels of interest on borrowing.

He explained: "Gearing has generally come down over the past 10 to 15 years, and you can see this is reflecting the greater risk aversion among private investors and wealth managers.

"This caution has prevented investment trusts from getting too risky in terms of gearing levels, especially after so many years of strong market growth.

"If anything, I predict levels of gearing may reduce further."

In June, Garrett Fish, manager of the £1bn JPMorgan American Trust, said he had been reducing the level of debt in his trust because he was relatively cautious about market movements and was mindful of the uncertainty and high valuations in the market.

Tim Morris, independent financial adviser with Russell & Co, said: "I think most equity investors are able to understand the impact that a high level of borrowing can have on any company.

"However, gearing is perceived as an additional risk by many investors, so generally only experienced investors with a greater appetite for risk can see this as a benefit which can enhance their returns."

However, he offered a caveat on investment trusts, in that premiums right now are "generally high".

He said: "As with high company valuations - this shouldn’t be a reason to discount them completely (no pun intended). At present I’m just wary that when the bull market does end, the fall form the top will be magnified.

"A bigger issue is cost. I don’t have an issue with a slightly more expensive find which has consistently outperformed its index for at least five to 10 years. This can negate the cost difference.

"However, many investment trusts have been priced around the 1 per cent mark. Compare that to an index fund which is less than 10 times the cost and the ability to achieve consistent additional returns will greatly diminish."

simoney.kyriakou@ft.com