Investment Trusts  

Scottish Mortgage adds £188m of debt

Scottish Mortgage adds £188m of debt

The board of the £8.7bn Scottish Mortgage investment trust has borrowed an additional £188m to make new investments.

The trust is already the largest in the UK market, and has returned 153 per cent over the past five years, compared with 88 per cent for the average trust in the AIC Global sector in the same time period. 

Commenting on the new borrowings, Fiona McBain, chairman of the Scottish Mortgage, said: "The board views the capacity to issue modest amounts of debt as one of the principal advantages of Scottish Mortgage's investment trust structure.

"I am delighted to say that that the company continues to be able to raise private placement debt at highly attractive long-term rates. This is reflective of the enduring strength of Scottish Mortgage's proposition and should enhance the long-term returns for our shareholders."

Scottish Mortgage already has gearing of 8 per cent, which is lower than several of the trusts in its sector. For example the Majedie trust has gearing of 13 per cent while the F&C Investment Trust has gearing of 10 per cent.

The borrowing is in three separate debt agreements, ranging in length from 20 to 30 years. The highest interest rate being paid is 2.3 per cent for twenty years. 

Gearing, when money is borrowed by trusts to buy more investments, can boost performance because the borrowed cash is put into the market it means each shareholder effectively has more capital invested in the trust than they actually put in.

This means if an investment goes up in value the investor makes more, but if an investment falls in value those losses are amplified for the end investor.

Scottish Mortgage has substantial investments in large US and Chinese technology and healthcare companies. Speaking at an investor day in London recently, the trust’s joint manager Tom Slater said his interest in investing in Chinese companies has grown in recent years, while he sees the US market as somewhat less attractive because  he believes some of the large US tech companies, such as Facebook, have become less innovative than their Chinese counterparts.

Mr Slater is also keen to invest more into companies that are not quoted on any stock exchange.

He said he “doesn’t view them as any different” to quoted companies, particularly because the unquoted companies in which the trust invests are long-established. 

david.thorpe@ft.com

What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.