Data as at: 27/03/2024

Gearing

Gearing policy

Gearing is defined as the ratio of a company’s long term debt less cash held compared to its equity capital, expressed as a percentage. The effect of gearing is that, in rising markets, the company tends to benefit from any growth of the company’s investment portfolio above the cost of borrowing. Conversely, in falling markets the company suffers more if the company’s investment portfolio underperforms the borrowing cost.

Borrowing limits

The directors have determined that the maximum level of gearing will be 25% of the company’s total assets at the time of drawdown

Ways in which investment companies can magnify income and capital returns, but which can also magnify losses.

At its simplest, gearing means borrowing money to buy more assets in the hope the company makes enough profit to pay back the debt and interest and leave something extra for shareholders.

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how gearing works table

However, if the investment portfolio doesn’t perform well, gearing can increase losses. The more an investment company gears, the higher the risk.

Investment companies can usually borrow at lower rates of interest than you’d get as an individual. They also have flexible ways to borrow – for example they might get an ordinary bank loan or, for split capital investment companies, issue different classes of share.

Not all investment companies use gearing, and most use relatively low levels of gearing.

An indication of the maximum and minimum levels that the company would expect to be geared in normal market conditions.

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