LONDON – Third Insight paper from J.P. Morgan Asset Management looks at the advantages of investment trust gearing

May 28, 2012

London, 28 May 2012: J.P. Morgan Asset Management, the largest manager of investment trusts in the UK, has launched the third paper from the Investment Trusts, Insight Series, specifically for financial advisers. This third paper looks at the benefits of gearing within investment trusts and highlights five types of debt that can be used by investment trusts.

James Saunders Watson, head of marketing for J.P. Morgan Investment Trusts said, "If you believe returns from an asset class will, over time, outweigh the cost of borrowing and if historical levels of volatility have been fairly low, you should be comfortable with adding some degree of leverage to boost performance. From the evidence it appears that, in general, investment trusts try to maximise the impact of leverage in rising markets while limiting the negative impact in falling markets. Over time, this active management of gearing can help produce superior returns compared with other pooled funds, without a significant increase in volatility."

Five types of debt used by investment trusts

  • Bank overdrafts – can be drawn on during volatile markets to take advantage of short-term opportunities
  • Fixed-term bank loans – can be arranged for longer-term borrowing, either at fixed or variable rates
  • Debentures – pay a fixed rate of interest to lenders and usually have a 20 to 30-year term, providing long-term access to capital
  • Convertible bonds – pay a fixed rate of interest for a fixed term, at the end of which holders can choose either to have their loan returned or to convert into ordinary shares
  • Floating rate notes – pay a variable interest rate that resets regularly over a fixed term, protecting lenders from losing out in times of rising interest rates

David Barron, Head of Investment Trusts at J.P. Morgan Asset Management said, "Our Insight Series aims to demonstrate how investment trusts can play a key role in a balanced investment portfolio, providing opportunities for both conservative investors and those with a greater appetite for risk. We believe there is an opportunity for investment trusts to really broaden their appeal as a result of regulatory changes. As the manager of 21 investment trusts we aim to continue to be at the forefront of investment trust industry developments and welcome the changes and opportunities from the RDR."

The third paper in the Investment Trusts, Insight Series can be found here.

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Notes to Editors

About J.P. Morgan Asset Management

J.P. Morgan Asset Management is part of JPMorgan Chase & Co. and is a global asset management leader providing world-class investment solutions to clients. With US$1.4 trillion in assets under management (the Asset Management client funds of JP Morgan Chase & Co. as at 31 March 2012) and offices in 41 locations around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.

J.P. Morgan Asset Management is a trading name of J.P. Morgan Asset Management Marketing Limited which has issued this material in the United Kingdom and which is authorised and regulated by the Financial Services Authority. Registered in England No. 288553. Registered office: 125 London Wall, London EC2Y 5AJ.

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