How Investment Trusts Borrow Cash to Boost Profits

Investment trusts can use gearing to boost returns. So now that the banks are lending again post-financial crisis who is successfully utilising this facility?

Jackie Beard, FCSI 17 June, 2014 | 10:54AM

Since the financial crisis, it’s been common to hear from fund managers and boards of investment trusts that new borrowing facilities have been nigh-on impossible to negotiate. That is, until the last 12 months or so, when banks started to lend once again. Indeed, we have seen a fair few investment trusts increase their gearing facilities through new or renegotiated facilities, and furthermore a few have changed the nature of their gearing, too.

For some time, it has been common to see revolving unsecured loans in use as an investment trust’s mode of gearing as this continues to be relatively cheap money with only a short-dated commitment. Take the example of Aberforth Smaller Companies (ASL). Earlier this month it announced a new three-year revolving unsecured debt facility with Royal Bank of Scotland; although this replaced an existing facility, they have negotiated the maximum amount at a level that’s 25% higher than previously. To a large part that reflects growth in the asset value of the fund itself, but it also gives the fund’s management team significant flexibility in how and when they wish to deploy any of that cash.

Another example is Murray International (MYI): in June 2013 the company announced that RBS had agreed to the provision of both a new £120 million loan and also the renewal of two short-dated Japanese yen loans. The latter aren’t a play on the currency as manager Bruce Stout hedges out that currency exposure; rather, it’s a reflection of the fact it’s very cheap debt, originally drawn down at a time when UK financial institutions were not willing to lend.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Aberdeen Asian Income Ord186.50 GBX1.91
Aberdeen Standard Equity Inc Trust Ord268.50 GBX1.70
Aberforth Smaller Companies Ord889.00 GBX-0.11
City of London Ord331.50 GBX1.84
Murray International Ord982.00 GBX0.72
Perpetual Income & Growth Ord220.00 GBX0.92
Temple Bar Ord748.00 GBX-0.80

About Author

Jackie Beard, FCSI

Jackie Beard, FCSI  is Director of Manager Research Services, Morningstar EMEA

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