5
Geared tailwinds
Whilst the capital structure of investment trusts can make for better investment decisions and allow for a broader range of investible assets, it also allows the manager to compound this advantage courtesy of gearing. Like other public companies, investment trusts are free to borrow money subject to any restrictions agreed with their board of directors and terms agreed with the lenders. By contrast, open-ended funds are restricted by regulations and so cannot.
Mathematical logic
The term ‘gearing’ relates to the ability of investment trusts to borrow money to buy more portfolio assets in order to enhance returns. The bigger the portfolio due to the extent of gearing, the greater the potential returns. Once the money is borrowed, ...
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