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Gearing levels were ‘modest’ heading into market sell-off

Investment trust gearing levels were ‘modest’ heading into market sell-off

Data shows that ahead of the sell-off most investment trusts had ‘modest’ gearing levels, so losses were not as heavy as they otherwise could have been.

Money Observer April 23, 2020 by Kyle Caldwell

The use of gearing to enhance returns over the long term is a key advantage for investment trusts, providing the trust’s underlying investments increase in value. But when markets fall heavily, gearing has the reverse effect: investors will suffer greater losses per share (see below for a more detailed explanation).

The good news, though, according to data from Winterflood and the Association of Investment Companies, is that heading into the sell-off, most investment trusts had “modest” gearing levels, with various managers adopting a relatively cautious approach…

Following the steep market sell-off, the data shows that 39 trusts (21% of the sample) decreased gearing. In addition, the number of ungeared trusts increased from 64 (35%) to 70 (38%)…

Even before Covid-19 became a serious problem, there were many investors who felt that the bull market was running out of steam, notes James Carthew, head of investment company research at QuotedData.

He adds: “Or looking at it another way, I would be hard-pushed to name many managers who thought their stocks were very cheap.

“There are some funds that have gearing built into their structure – the split capital funds, for instance. They suffered very badly when the market dived (Acorn Income, Aberforth Split Level, for example). There are a couple of funds we follow that always run with high gearing but use that to buy bonds or preference shares, which tend to be more resilient when markets fall. They (Henderson High Income, Shires Income) held up pretty well.”

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