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Are investors hunting the wrong trusts for income?

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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.

'As at 30 September, the headline cover was 44 although it's worth pointing out that this understates the real cover as it does not reflect a fully operational portfolio,' Brierley said.  'New investment has accelerated over the past 18 months and the company has a current pipeline of £54 million with an additional £30 million of approved projects,' he added.

This means that in the future MedicX's cover should be enhanced by new acquisitions and its scope for further asset management.

The alternatives

To some, MedicX offers the best quality assets within the healthcare property and closed-ended funds sectors.  A close comparison would be the Primary Health Properties trust, however analysts at Edison Investment Resarch believe that this Reit offers investors access to a secure rental stream.

3i Infrastructure could be another plausible alternative.  According to the trust's results, published today, it has reduced its cash drag and is tipped by Oriel Securities to increase its dividend meaningfully.

Moreover, Numis' analysts point out that £997 million 3i looks able to comfortably cover its dividend and its portfolio has continued to deliver.

'In its IMS covering the period 1 October 2011 to 24 January 2012, the management comments that the portfolio continues to perform well and is generating good levels of income. Dividends and interest received from portfolio assets totalled £14 million in Q4 2011, taking income received to c.£50.7 million. We estimate the portfolio should generate underlying income of c.£65 million in the year to 31 March, comfortably covering the DPS,' the team at Numis explained. 

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