Several trusts having recently taken on long-term debt at low rates, such as Bankers, Witan, Temple Bar and RIT Capital Partners.
As at the end of May, the average gearing across all sectors was 6%. Among the sector averages, UK All Companies was 3%; UK Equity Income was 9%; UK Equity & Bond Income at 10% with Property Direct UK and outlier at 21%.
Ian Sayers, chief executive at the Association of Investment Companies, expects the overall average to move closer to – though not above – 15%.
“A lot of trusts have old debentures that are unwinding anyway so they are replacing these with new borrowing,” he says.
“I think it will be in relatively mainstream funds either rolling over old debt or putting new debt into the structure, though not at a massive amount. Still if you down at 5% gearing, what’s the point? It’s not going to make a big difference so between 10% and 15% is a more natural level.”
He adds: “The danger, people might say, is increasing more risk but I would ask new or prospective investors in this sector: what do you think equity markets on average will return over the next 20 years?
“If you say less than 3.5% what on earth are you doing buying an equity fund? That’s the level we are securing borrowing at. I suspect you might look back at this in 10 or 15 years’ time and see that now was almost the perfect time to borrow. After the financial crisis it was hard, but now there is a willingness to lend and we are at a point where interest rates are still low enough to borrow.”
