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Much of the long-term debt taken out by trusts in the era of astronomical interest rates has now begun to mature . Holly Black finds out how this will affect performance
T HE 1980s IS OFTEN
LABELLED BY FASHIONISTAS as the decade that style forgot . Whether it is shoulder pads , fluorescent tracksuits or the frankly indefensible mullet , photos of anyone demonstrating a faithful adherence to the fashions of the day naturally seem to gravitate towards the back of the family album .
Another feature of the 1980s – and early 1990s – that many investment trust managers wish they could forget about is doubledigit interest rates . While just a distant memory for most of us old enough to remember them , many trusts arranged long-term finance during this period when the cost of servicing debt was astronomical and inflation was climbing . In October 1989 , for example , the Bank of England base rate stood at 14.87 per cent . A decade later the base rate had fallen to 5.5 per cent but , even then , few investors could have foreseen just how low it had to go .
A DRAG ON RETURNS As a result , many investment trusts have found themselves saddled with debt at rates of 10 per cent or even higher , which seemed good value when it was secured .
Charles Cade , head of investment companies research at Numis Securities , says : “ These have proved to be a drag on returns in a falling interest rate environment , but many of these older debt issues are now maturing , allowing the funds to refinance more cheaply .”
Gearing is a well-publicised advantage of investment trusts . These vehicles are able to borrow money to invest , giving them the opportunity to boost their returns and income . In good times the strategy can provide a serious uplift to performance , while in a market downturn it can serve to magnify losses .
But part of the success of a trust ’ s gearing strategy will be determined by whether it can outperform the interest rate on its debt – and , for some trusts , this just got a lot easier .
Long-term debt is much cheaper to service than the short-term variety – this is true for consumers arranging a mortgage or loan , for businesses securing finance and , similarly , for investment trusts taking on gearing . This is because you are taking a risk
2 trustnet . com