Certainly, it makes sense for long-term investment vehicles to borrow cheap money when they can do it – preferably before the Bank of England begins to hike rates – though the presumption must be that inflation will come back into play.
Stephen Peters, investment analyst at Charles Stanley, believes such lending is unlikely to extend much beyond mainstream equity trusts of a hefty size.
“The likes of Temple Bar, Alliance Trust and Witan are going to be around in 10-15 years’ time and can probably therefore afford to take on debt now, though most other trusts either have boards or shareholders that don’t want them to do it,” he says.
“I think the investment trust sector should take advantage of long-term low interest rates and gear up, but I am a little bit sceptical that when push comes to shove that a lot of boards will commit to 10 to 20 years leverage.”
For Tim Cockerill, investment director at Rowan Dartington, there is a clear opportunity for the closed-ended space to gear now given interest rates are expected to rise in the next 12 months.
“With debt likely to become more expensive, locking in low levels for the long term may well prove to be a prudent strategy,” he says.
“The issue though is whenever you borrow money for investment, you have to be confident that you can find stocks that are generate new long-term returns which more than compensate for the cost of borrowing that many.
“You could, for example, build a portfolio of income stocks for the yield, which may alone pay for the interest, and then benefit from the capital growth. Trusts should be confident, because the long-term numbers on the market are in their favour.”
