There are 20 pure equity trusts that have a gearing in excess of 12 per cent at present, two of which have a gearing of more than 20 per cent.
Most highly geared equity trusts
Source: Oriel
For investors who are bullish on a particular sector or manager, a trust that is highly leveraged may be an attractive prospect – particularly if the portfolio is also on a discount.
Gearing, which is also referred to as leveraging, is when a trust borrows money so that it can make a higher-conviction call on an investment. This method magnifies gains or losses, depending on whether the trust does well or badly.
Simon Gergel’s £553m Merchants Trust is the most highly geared [25 per cent], followed by Neil Woodford’s Edinburgh Investment Trust [22 per cent].
Woodford’s portfolio has long-standing debentures that were taken out in the late 1980s and early 1990s, which goes some way to explaining why its level of gearing is so high.
The Merchants Trust's board normally maintains a relatively high level of gearing as well.
The most heavily geared Japanese trusts are Baillie Gifford Japan at 18 per cent, Fidelity Japanese Values at 16 per cent and Baillie Gifford Shin Nippon at 12 per cent of net asset value (NAV).
Anthony Bolton’s Fidelity China Special Situations remains relatively highly leveraged at 15 per cent.
Given the poor performance of the trust in recent months, this position has compounded losses: according to FE data, it is down 23.33 per cent since its launch in April 2010, compared with -5.17 per cent from its MSCI China benchmark.
Performance of trust vs index since launch
Source: FE Analytics
Darwall’s Jupiter European Opportunities trust is 19 per cent geared. Unlike Bolton’s portfolio, this move has boosted performance in recent months, thanks to the manager’s successful stock selection.
According to FE data, his portfolio is up 50.47 per cent over one year, compared with 13.38 per cent from its FTSE World Europe ex UK benchmark.
Of those trusts with a multi-asset focus, Scottish American and British Assets stand out as the most heavily geared, although much of the money they have borrowed is invested in assets other than equities.
Performance of trust vs index over 1-yr
Source: FE Analytics
Scottish American IT has net leverage of 26 per cent, primarily invested in property and bonds.
Similarly, British Assets shows net leverage of 20 per cent, with much of this invested in fixed interest, and equity leverage only accounting for 5 per cent.
The majority of trusts on the list are currently on a discount, including Merchants, which is trading at -4 per cent to NAV, Edinburgh Dragon, which is trading on -10.7 per cent, and Fidelity Japanese Value, which is on -15.2 per cent.