To gear or not to gear? That is the question

The competitive advantages that investment trusts have over their open-ended cousins are well docume...

The competitive advantages that investment trusts have over their open-ended cousins are well documented - low costs, an independent board, discounts and of course gearing - the ability to borrow to purchase additional investments. The idea is to make sufficient returns to meet the costs of the borrowing, repay it and make a capital profit on top of that. This is not without risks and although gearing provides an excellent opportunity for managers to deliver significant outperformance, there can be a significant downside too - if the value of portfolio falls, this borrowing will magnify a...