The managers of UK investment trusts are increasing the level of debt to buy more UK shares, according to data from Morningstar and the Association of Investment Companies (AIC).
Data from the Association of Investment Companies (AIC) and Morningstar shows that in the period from the end of July 2018 to the end of January 2019, the average trust in the AIC UK All Companies sector doubled its gearing from 5 per cent to 10 per cent.
The average trust in the AIC Equity Income sector increased gearing to 9 per cent from the previous 8 per cent in the same time period.
Investment trusts, unlike open-ended funds, can take on long-term debt and use it to make more investments.
If the money is invested prudently, then the investments should generate enough cash to repay the borrowed money with interest, and provide additional returns for shareholders.
If the money is invested badly, then the returns to shareholders are diluted by the need to pay the debt.
Among the fund managers to increase the level of gearing on their trust in recent months has been Job Curtis, who runs the £1.5bn City of London trust.
He told FTAdviser he has increased the level of gearing on the trust from 7.7 per cent to 12 per cent over the past six months.
James Henderson, who runs the Law Debenture investment trust and two other trusts, has also indicated he will increase gearing.
Both managers cited cheap UK stock market trades as being the reason behind the move.
But one fund manager who won’t be increasing the level of gearing on his trust is Nick Train. His £1.6bn Finsbury Growth and Income trust has less than 2 per cent gearing, but he has no plans to increase it.
Mr Train said borrowed money "makes me worry", and that the concentrated nature of his portfolio meant he felt the trust takes enough risk.
Jim Harrison, an adviser at Master Adviser in London, said: "We are happy with gearing – although it can cause short term capital volatility, and is uncomfortable in a sell off, it tends to be a positive over the longer term (5/10) years, which is our minimum recommended holding period.
"Gearing on the trusts we use is usually at an acceptable level, say up to around 15 per cent. We trust individual managers to make the call on gearing; clearly Nick Train isn’t a fan, but his record clearly shows he knows what he is doing."
david.thorpe@ft.com
