International generalist investment trusts are geared up to benefit from expected global growth next...
International generalist investment trusts are geared up to benefit from expected global growth next year.
In October 1998 when markets were digesting the Russian devaluation and there was a crisis of confidence over the prospects for equity markets, the average gearing on an international generalist trust was 109%, according to the AITC. Continued recovery in the Far East and Japan together with the restructuring story in Europe and the technology boom in the US has led managers to increase their gearing. Currently the average gearing on generalist trusts is 111%.
Over the last month, Scottish Mortgage, managed by Max Ward at Baillie Gifford, has increased its gearing from 111% to 113%. Ward is confident on global growth next year so long as the US market does not crash. More than half of the money raised via gearing is in bonds when traditionally fixed interest paper is regarded as a place for those with bearish forecasts.
Rather than investing in AAA-rated paper Ward is favouring debt at the lower end of the market particularly from the growing European corporate bond market. He says: "Some of the paper I am investing in gives me access to companies which are not listed. I have Cellco Finance paper which is issued by TurkCell, the biggest mobile phone company in Turkey. The bond offers a yield of 14% and the company itself should be relatively stable as Sonera, a Finnish mobile phone company and one which we also favour, has a large equity stake in it."
Ward also has holdings in Colt Telecom, a Spanish company offering a bond yielding 7%, Argentinean government bonds yielding 11% and Alliance Capital European Enhanced Income fund. He says: "I do not usually favour investing in other funds, but the product gave us access to a sector I am particularly bullish about."
The remaining part of the gearing is invested in equities. Looking forward into next year Ward says he is not planning to put any more money in Japan and the Far East but rather increase the portfolio's exposure to Europe. Scottish Investment Trust, managed by Ian McLeish and Donald Ness, will also be favouring Europe next year. McLeish says: "Europe will benefit from the continued restructuring and M&A activity and there should be growth in company profits. Though some believe the recovery story in Japan is nearly over we still believe there is huge potential in the market."
The trust has a relatively low gearing at 106% compared with the sector average. However, McLeish acknowledges there is an opportunity to increase the trust's borrowings cheaply in the current low interest rate environment. He says: "Some trusts have taken advantage of the low interest rates to increase their gearing. We will certainly be looking at increasing our gearing but only if we cite specific investment opportunities and not because gearing is relatively cheap."
Though the majority of trusts have gearing above 105%, with some being more than 10% geared, Fleming Overseas investment trust is only 104% geared. Peter Harrison, manager of Fleming Overseas, says: "We are not optimistic about the prospects of the bond and equity markets next year, this is mainly due to the shape of the US market currently."
Harrison points out there is a huge gap in the valuations of companies with exposure to technology and those with no exposure. With the expectation of a correction in the US the portfolio of Fleming Overseas is underweight the market and overweight Japan and Europe. Harrison accepts that if there is a correction in the US it will have a knock-on effect on other global markets.
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