Investment Trusts: What is Gearing?

Would you borrow money in order to invest it? Investment trust managers do just that, reinvesting debt with the aim of boosting returns to shareholders

Emma Wall 9 February, 2015 | 3:31PM
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This article is part of Morningstar’s Guide to Investment Trusts, highlighting the benefits of these unique investment vehicles – busting the investment trust jargon, revealing potential pitfalls and celebrating those experienced managers who have earned the top ranking from Morningstar fund analysts.


Gearing is the ability to borrow money to invest that money on behalf of your shareholders and is a tool uniquely available to investment trust managers, rather than managers of open-end funds. As investment trusts are listed companies, they operate under company law and just like any other corporate entity can can borrow money against their assets and then invest the proceeds. This will increase returns to investors in a rising market – but can increase losses in a falling market.

One thing to be careful of is that managers should only be using it where they think they can make more than the cost of servicing that debt. So, they've got to have pretty high conviction in the markets to be able to invest it for their shareholders.

A gearing factor of 20% means that for an investment trust that has assets of £100 million, 20% or £20 million would be held in debt. This would formerly have been represented as gearing of 120, but the investment industry recently simplified gearing statistics to percentages to make it easier to understand. You will therefore see gearing expressed as a percentage of total assets on all Morningstar investment trust reports and investment tools.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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