IT Portfolios - Top Ten Holdings

cloud_dog

bostonerimus wrote: »

I'm not trying to tar, just pointing out that there are potential risks that come with ITs that you don't get with open ended funds.

So should we discuss the increased risk with holding, for example, property asset OIECs as opposed to ITs?

Audaxer

cloud_dog wrote: »

Yes. Perhaps bostonerimus is correct...perhaps there are some people who don't fully understand gearing?

I don't understand what you mean cloud_dog. Are you saying that what I said about gearing is incorrect?

cloud_dog

No, simply that whilst bostonerimus had raised the consideration, it appeared that they may not have fully understood how the gearing was reported.

I have to own up to it being a subtle mickey take at bostonerimus expense (bad dog).:(

bostonerimus

cloud_dog wrote: »

No, simply that whilst bostonerimus had raised the consideration, it appeared that they may not have fully understood how the gearing was reported.

I have to own up to it being a subtle mickey take at bostonerimus expense (bad dog).:(

I also thought that the target was Audaxer (I'm a ranndoneur myself). I was careful to connect "Gross Gearing" with the numbers over 100%. Obviously 108% actually means an amount of borrowing of 8% of the assets, anyone investing in a company that is borrowing an amount greater than the assets of the company would need a very strong stomach.

bostonerimus

Thrugelmir wrote: »

Why do I want to buy shares in a company simply because everyone else is? Not necessarily a sound idea. Passive investing has it's pitfalls.

I completely agree. I don't necessarily want to criticize here, just illuminate.

Audaxer

bostonerimus wrote: »

I was careful to connect "Gross Gearing" with the numbers over 100%. Obviously 108% actually means an amount of borrowing of 8% of the assets, anyone investing in a company that is borrowing an amount greater than the assets of the company would need a very strong stomach.

bostonerimus, you said in your earlier post "It would be interesting to see what percentage of people who own Scottish Mortgage Investment Trust know that it is over 100% gross geared" which tended to indicate that you were saying it has unusually high gearing - whereas nearly all ITs show gross gearing as over 100%.

So although SMT may be quite a high risk IT with recent very high returns, I don't think from my limited knowledge that the risk level of that IT has anything to do with the gearing.

bowlhead99

bostonerimus wrote: »

I also thought that the target was Audaxer (I'm a ranndoneur myself). I was careful to connect "Gross Gearing" with the numbers over 100%.

The difference between the terms gross gearing and net gearing typically relates to the two concepts of, on the one hand total debt drawn, vs on the other hand total debt drawn and actively deployed into assets other than cash or near-cash. The terminology of gross gearing Vs net gearing is nothing to do with being over 100% of anything.

For example if shareholders have provided £100m of capital and £25m of debt has been issued, the gross gearing (potential returns enhancement) is 25%. However if shareholders provided £100m of capital and £25m came from a finance facility or debt issuance, but then £10m is simply sitting in cash or equivalents and could be repaid instantly, and is not "at work" in the investment portfolio, then the gearing is not really a full 25%. The gross gearing is 25% while the net gearing is only 15%. (total debt less cash and near cash is £15m, over £100m of shareholders' funds)

Using a real world example of the Scottish Mortgage last factsheet their gross (potential) gearing calculated on the AIC basis was declared as 8% while net (active) gearing was reported at 7%.

The 100+% in your example is because you are looking at total assets over net assets which is always going to be over 1 (100%) if there is any gearing at all. Using your method of presentation (which HL choose to use but Baillie Gifford the investment manager does not in their own factsheet), those 8% and 7% would be reported as 108% and 107% respectively. Because you are saying the geared gross return is 108% *of* the shareholder raw gross return rather than saying it is an extra 8% *on top of* the raw gross return. But if you were looking at the net geared figure of 7% [(total borrowings less cash and near cash) over shareholders' funds] your method of presentation would call it 107% net geared

So, you call it 108% gross geared or 107% net geared ; Baillie Gifford in the SMT factsheet call it 8% potential gearing or 7% active gearing. But gross or net as the gearing measure doesn't traditionally refer to greater or less than 100%. With your way of doing it, *any gearing at all* is always over 100%.

Obviously 108% actually means an amount of borrowing of 8% of the assets,

What? In your example the 108% means borrowing 8% of the shareholders funds, it doesn't mean borrowing 8% of the assets.

In that situation which we call 8% gearing and you call 108% gearing, the borrowing equates to financing 8/108ths of the assets via debt, and financing the other 100/108ths via shareholder capital.

anyone investing in a company that is borrowing an amount greater than the assets of the company would need a very strong stomach.

As per the example it would be borrowing over 100% of shareholder capital not 100% of assets. Yes you need a strong stomach for it but people do it with residential property all the time .

For example put up £40k deposit and borrow £60k to finance a £100k house; you have borrowed 150% of your capital so when the house prices all double in value your gross profit of £40k from what would have been a small property is enhanced by another 150% of the £40k so you walk away with £100k total profit (after selling for £200k and paying back the £60k of cheap debt and putting your own capital back in the bank).

bostonerimus

bowlhead99 wrote: »

So, you call it 108% gross geared or 107% net geared ; Baillie Gifford in the SMT factsheet call it 8% potential gearing or 7% active gearing. But gross or net as the gearing measure doesn't traditionally refer to greater or less than 100%. With your way of doing it, *any gearing at all* is always over 100%.

I think you are making my point. Borrowing is a common tactic employed by ITs and the level of that borrowing is sometimes difficult to evaluate as it can be expressed in so many different ways. The assumption that I did not know what 108% gearing was for SMT also reinforces my initial point that maybe lots of people actually don't understand all this.
On the H&L website SMT gross gearing is given as 108% and it is defined as (gross assets /net assets) * 100....on that basis zero borrowing is a gross gearing of 100%. Not the most intuitive way of expressing this.

bostonerimus

Audaxer wrote: »

bostonerimus, you said in your earlier post "It would be interesting to see what percentage of people who own Scottish Mortgage Investment Trust know that it is over 100% gross geared" which tended to indicate that you were saying it has unusually high gearing - whereas nearly all ITs show gross gearing as over 100%.

So although SMT may be quite a high risk IT with recent very high returns, I don't think from my limited knowledge that the risk level of that IT has anything to do with the gearing.

I think you should also quote the last part of my comment where I state that SMT is not highly geared.

It would be interesting to see what percentage of people who own Scottish Mortgage Investment Trust know that it is over 100% gross geared or even know what that means.,but at 108% Scottish Mortgage isn't as high as some.

I am giving out some numbers and some terms for consideration, but then putting them in context as 100% certainly is a big percentage, but in this case where you choose your origin is vital and SMT doesn't borrow as much as some....I've seen 133% for some closed end funds in the US.

Audaxer

bostonerimus wrote: »

I think you should also quote the last part of my comment where I state that SMT is not highly geared.

The last part of your original comment said that Scottish Mortgage is not as highly geared as some. Looking at the comment as a whole it appeared as if you were indicating that SMT was highly geared but not as high as some other ITs.