by Val Cipriani, Investors Chronicle, July 23, 2025:
The ability to use debt to ‘gear’ a portfolio is one of the key features that differentiate investment trusts from their open-ended counterparts.
Some trusts had even locked in interest rates as low as 1.8 per cent before the market turned three years ago, boosting returns when others in the sector are looking at rates of 6 per cent or higher on new debt, according to research from investment bank Stifel..
Most of the trusts identified by Stifel have multiple tranches of cheap debt with different costs; overall, interest rates range from 1.8 per cent, seen at Mercantile and Monks (MNKS), to Dunedin Income Growth’s (DIG) 4 per cent, with many in the 2-3 per cent range. The debt maturities are long or very long, falling in the 2030s, 2040s or in some cases even 2050s..
Expensive debt
James Carthew, head of investment companies at QuotedData, noted that most trusts use revolving credit facilities (RCFs) to borrow money, while a few, such as Fidelity China Special Situations (FCSS), BlackRock Frontiers (BRFI) and CC Japan Income & Growth (CCJI), use derivatives or contracts for difference (CFDs).
“Because the trend of short-term rates is downwards and long-term rates upwards, it probably makes much more sense to use RCF-type arrangements or CFDs, where the cost is based on short-term rates, rather than issue long-term debt currently,” he said..
Carthew mentioned Cordiant Digital Infrastructure (CORD), which is paying between 3.7 per cent and 4.7 per cent over the five-year Euribor swap rate for its funding requirements. “That looks like a fairly hefty margin over the benchmark, but it helps that Euribor is about 2 per cent and that seems unlikely to rise by much currently,” he said.
In the renewables sector, the most highly geared trust is NextEnergy Solar Fund (NESF), at 97 per cent using the Association of Investment Companies (AIC) gearing measure, although Carthew said interest costs “seem manageable”.
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