According to Winterflood Investment Trusts, the average level of net gearing in equity invested trusts has dropped two percentage points since the turn of the year, despite the fact that global markets are trading around record high levels.
This is at odds with a recent global fund manager poll from BofA Merrill Lynch, which revealed a record number of managers were taking above-normal levels of risk, while average cash balances had fallen to their lowest level since 2013.
When it comes to investment trusts the use of gearing – basically borrowing money from the bank to invest – is indicative of how bullish the manager of that fund is. The more optimistic you are, the more you borrow and vice versa.
What you don’t want to be doing is borrowing money into a falling market as it compounds your losses, and it seems investment trust managers don’t want to be flying as close to the sun as those polled by BofA ML.
According to Wins, at the start of the year the average level of net gearing of 200 equity invested closed-ended funds was 8%, whereas at the end of August it was 6%.
Meanwhile, some 45 funds had gearing greater than 10% at the end of 2016, while the number today has fallen to 36. Similarly, the number of ungeared funds has jumped from 75 to 84, which Wins notes is almost 42% of the population.
“Anecdotally, it appears that many fund managers are looking to let gearing levels decline, or are actively de-gearing,” says Simon Elliott, a research analyst at Wins.
“The latter is true for Lowland, which started the year with gearing equivalent to 15% of assets, while it has subsequently fallen to 6%.”
Managed by James Henderson at Janus Henderson Investors, the £400m Lowland trust sits in the IT UK Equity Income sector. Another high-profile UK fund that has cut its gearing is Fidelity Special Values, managed by Alex Wright.
Wright recently hit the five-year landmark managing the £647m fund, which was made famous by its former manager Anthony Bolton who launched it in 1994. Since the turn of the year it has cut its net gearing by 2%, which Elliott says reflects a reduction in stock-specific ideas.
More globally, the £6.4bn Baillie Gifford-run Scottish Mortgage trust, managed by James Anderson, has cut its gearing from 10% to 5% since the turn of the year.
“Although still positive on long-term growth prospects, Scottish Mortgage highlighted in its recent interim results that its managers are considering the future prospects of the six dominate internet companies to determine whether they still have the potential to become a multiple of their current size,” says Elliott.
Despite the falling gearing levels, Wins notes there is no sign as of yet of widening discount to net asset value (NAV) levels across the investment company universe.
Indeed, at the end of October, the sector average discount to NAV stood at 4.9% (excluding private equity, hedge funds and direct property funds), compared with 5.2% at the end of September and 5.5% at the end of last year.
