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View the article online at http://citywire.co.uk/wealth-manager/article/a560694

Are investors hunting the wrong trusts for income?

by Sarah Miloudi on Jan 25, 2012 at 13:27

Are investors hunting the wrong trusts for income?

'Low' is a three letter word often feared by investors, but it is also one that is cropping up ever more frequently in the financial press.

With interest rates trapped at historic low levels, now for more than two years in the UK, more and more investors are preparing for a environment bereft of yield and as their search for a sustainable income stream widens out, many have been turning to specialised infrastructure and property trusts.

MedicX, which is managed by specialist property advisers MedicX Fund Group, is a £124.6 million closed-ended fund that has been a beneficiary of this move towards income-focused investments.  Over the past 12 months the trust has delivered share price growth of close to 10% and has increased its net asset value (NAV) per share in the region of 6%, while its benchmark MSCI ACWI/real estate has fallen 3.1%.

MedicX also comes out on top of its sector according to a Citywire one and three-year analysis analysed which categorises the trust in the specialist property sector.

The right choice for income?

On the face of it, the specialised investment company puts forward a fairly simple and compelling story to investors; it offers attractive yield within an asset class - primary healthcare infrastructure/specialist property - most are familiar with and the promise of a 7.4%  dividend yield - has lured some of the industry's best-known investors(Investec Wealth & Investment - 5.18%, Rathbones - 4.55% and Brewins - 9.90%) onto its shareholder register.

Too hasty?

But while MedicX has a lot going for it, there are a few potholes in its balance sheet.  Unlike some its peers the trust's dividend cover - the amount of income it has coming in relative to the cash it distributes to shareholders - stands at around 40% based on September's figures, while some of its peers are fully covered. 

Ultimately, this tells a story about the sustainability of income investors in the vehicle can expect, as provided the trust's earnings from its assets remain unchanged its divi steam could in the end prove unsustainable.

Should shareholders switch?

With its premium riding at 15.5%, investors might be considering a switch, particularly those keen to get a foothold in infrastructure, where the premiums range between 2% and 8% and there is arguably greater potential for capital growth.

However MedicX's house broker Collins Stewart argues that the trust continues to draw a following in a climate that has forced investors to prepare for 'lower for longer'.  While interest rates remain at 0.5% and growth is scarce, trust's like MedicX are something of a draw.

Moreover, the brokerage's Alan Brierley, director of investment company research, argues that concerns linked to the trust's divi cover will ease over time.

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1 comment so far. Why not have your say?

Austen Robilliard

Jan 25, 2012 at 16:55

As a group, we have analysed MedicX in great deal and the yield being paid (circa 7%) is well above the underlying rental yield of 5.8%. Furthermore, the trust has a £100 million borrowing facility at 5%, plus all the costs associated with operating an investment trust and it quickly becomes apparent it is paying dividends well above its free cash flow yield. They will therefore have to realise some capital to make up this shortfall.

The management are acutely aware of this and this is to reward private equity holders who have supported MedicX and provided there is capital growth of more than 2.5%pa, then the trust will be fine. On a pure valuation basis, the premium is high, as are the potential losses.

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