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Top gear: how equity investment trusts are using borrowing

Gearing can amplify good and bad performance
Top gear: how equity investment trusts are using borrowing

Investment trusts have some structural features that enable them to do things that open-ended funds cannot. This includes the ability to gear – borrow money to invest – so that they have more invested than the money they have taken from investors. This extra exposure has often enabled investment trusts to outperform similar open-ended funds that do not have gearing and relevant benchmark indices when these are rising.

However, investment trusts with a good level of gearing also make greater losses than markets and similar open-ended funds if prices move in the other direction. This is one of the reasons why investment trusts’ net asset value (NAV) and share price returns can be more volatile than the performance of similar open-ended funds and relevant market indices.

And this has happened to some UK investment trusts this year. The average Association of Investment Companies (AIC) UK All Companies sector trust's share price fell further than the FTSE All-Share index and the average Investment Association (IA) UK All Companies fund over the six months to 18 June, a period that captures the sell-off between February and March. But these investment trusts' share price returns outpaced the market over the three months to 18 June, a period in which prices have broadly recovered.

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