Gearing adds a layer of complexity to ITs, but it is not automatically a bad thing, explains Jackie Beard, director of closed-end fund research at Morningstar.
Gearing is one of the tools an investment trust has in its toolkit which, in its traditional sense as a loan, is not available to its open-end peers. It tends to provoke a marmite reaction, though - investors either love it or hate it. If used well, gearing can generate extra returns, but used poorly, or when markets are heading south, it can exacerbate losses. Gearing has garnered something of a tainted reputation. In the 1990s, some trust boards took out long-dated, fixed-term loans to provide long-term, structural gearing for their funds. This was underpinned by the belief the retu...
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