For financial professionals in the UK

How gearing can be used to enhance returns?

28 Jan 2022

This video explains what gearing is and how it can be used to enhance capital returns.

Key takeaways

  • Unlike other types of funds, investment trusts can borrow money through banks loans, overdrafts or private placement notes to fund the purchase of assets. This facility is called ‘gearing’.
  • Gearing helps the manager to enhance capital returns in a rising market to generate extra income over the medium-to-long-term as long as those returns are greater than the cost of borrowing.
  • Gearing increases volatility, therefore, any movement in the underlying assets’ values are magnified. Whilst returns are enhanced when markets rise, gearing exacerbates losses when investments fall in value.
  • There are two forms of gearing, structural gearing, which relates to bank facilities and other conventional forms of borrowing and synthetic gearing – achieved through the use of more sophisticated financial instruments such as futures or options.


Futures contract – A contract between two parties to buy or sell a tradable asset, such as shares, bonds, commodities or currencies, at a specified future date at a price agreed today. A future is a form of derivative.

Gearing – A measure of a company’s leverage that shows how far its operations are funded by lenders versus shareholders. It is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes.

Options – Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell-depending on the type of contract they hold-the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


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28 Jan 2022