Henderson EuroTrust (HNE) is in talks to increase its gearing facility, thereby giving it access to more cash to deploy in the market and potentially enhance investment returns.

The decision to increase gearing, which represents the proportion of debt to equity, normally signals that a fund manager is very bullish about the outlook from an investment perspective.

Borrowing money effectively gives an investment trust extra power to invest in the market, thus creating a bigger pool from which to earn dividends and/or generate capital gains.

Gearing is also a useful tool for the fund manager as it means they don’t always have to sell holdings when they find something else in which they’d like to make an investment.

Henderson’s Continental Europe-focused investment trust currently has a £20m borrowing facility which equates to about 8% of the value of its fund. Fund manager Tim Stevenson says he and the board feel it would be helpful to have the ability to be 10% geared.

He hopes to have the facility agreed by the end of March and will use it ‘as and when we feel the opportunity is right’. The amount of the existing borrowing facility currently being used equates to a 5.8% gearing level.

Speaking at Shares’ investment trust event on 15 March, Tim Stevenson says borrowing in euros and swiss francs is ‘extremely attractive’ at the moment. His borrowing rate is effectively zero at present although there are some bank fees to pay.

Stevenson believes European equities are currently good value on a relative basis, pointing out they are trading at a 14% discount to US equities. While he believes Europe’s economic strength is starting to slow, companies are enjoying earnings upgrades and the general economic environment is still favourable.

Henderson EuroTrust had no gearing earlier this year, but it used February’s global market sell-off to make more investments via the gearing facility.

‘We have more to spend but will do so prudently,’ Stevenson recently wrote in the trust’s monthly commentary. ‘We believe it is important to remember that Europe is just entering the big dividend paying season (generally March to end June) and this has been a supportive period in recent years.’

The investment trust has sold its stake in beer giant Heineken and Austrian bank Bawag. It has added to some of its existing biggest positions including sanitary systems group Geberit, logistics specialist Deutsche Post and testing group SGS.

Henderson Eurotrust’s strategy is to invest in companies with growing end markets, strong balance sheets, attractive valuations and good management. ‘Ideally we want to own companies that have a number one or number two global position,’ says the fund manager. (DC)

DISCLAIMER: The author owns shares in Henderson EuroTrust

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