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Crash Checklist: the highest geared investment trusts

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Crash Checklist: the highest geared investment trusts

The ability of investment trusts to gear, or borrow money, to increase the amount they invest on behalf of shareholders, is a key factor in why they have generally outperformed other types of investment funds that cannot use gearing or leverage to boost returns. 

However, what can be a long-term advantage can prove a disadvantage in the short term. As we have seen yesterday and today, investment trusts have been prominent among the list of fallers on the London Stock Exchange as the turbo-charging they get from gearing works against them and they fall faster than many stocks on the FTSE All-Share index.

That doesn't have to be a problem: assuming markets recover, investment trust share prices should bounce back as quickly as they fell, creating opportunities for nimble bargain hunters. Nevertheless, for most ordinary investors this can make uncomfortable viewing.

To be fair, many investment trusts reduced their level of gearing last year in anticipation of the sort of 'correction' we have seen in the past few days.

The following list compiled by Iain Scouller, an analyst at Stifel Funds, shows the 21 investment trusts investing in equities, or shares, that have gearing above 10%.

'With equity markets expected to see further falls today and likely to be volatile over the next few days we think it is worth looking at which funds investing in equities have the highest levels of leverage,' he said.

If nothing else it's a useful checklist that can explain why some trusts may have fallen more than others.  

Equity trusts with gearing of 10% or more

Investment trusts Gearing as % of assets
CC Japan Income & Growth (CCJI)  21
Woodford Patient Capital Trust (WPCT)  20
Fidelity Japanese Values (FJV)  18
Fidelity Chinese Special Situations (FCSS)  18
Henderson Opportunities Trust (HOT)  18
Invesco Perpetual Select UK Equity  16
JPMorgan Japanese (JFJ)  16
TR European Growth (TRG)  13
BlackRock Throgmorton (THRG)  12
Merchants (MRCH)  12
Perpetual Income & Growth (PLI)  12
Standard Life Equity Income (SLET)  12
Aberdeen Asian Smaller Companies (AAS)  11
Lowland (LIC)  11
Aberdeen Emerging Markets (AEMC)  10
BlackRock Smaller Companies (BRSC)   
JPMorgan Claverhouse (JCH)  10
JPMorgan Chinese (JMC)  10
Jupiter Emerging & Frontier Income (JEFI)  10
Schroder Japan Growth (SJG)  10

Source: Stifel Funds, AIC, company factsheets 31/12/17

Woodford Patient Capital Trust (WPCT) has been a big faller this week with gearing of 20%, although Scouller noted that around two thirds of the portfolio is invested in unquoted companies that are not traded on the stock market. 'Therefore on a day-to-day basis the net asset value published by the fund will only reflect the falls in quoted prices until the next time the unquoted portfolio is revalued,' he said.

Scottish Mortgage Trust (SMT), the UK's biggest equity trust and the only one in the FTSE 100 index, does not feature in the list as it had 8% gearing at the end of last year. The £6.6 billion fund has been a prominent faller and Scouller cautioned: 'However, the portfolio is relatively concentrated in growth stocks and if the current market correction is focused on growth stocks rather than defensive stocks, we think Scottish Mortgage could sell a relatively large fall in its NAV.'

In compiling the table Scouller netted off any large cash holdings held by trusts as these would offset their gearing. Similarly, he ignored trusts such as Murray International (MYI), which had 10% gearing but invested much of it in bonds and property rather than shares.

 

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