In November’s Autumn Statement, chancellor Philip Hammond highlighted a number of spending priorities in the year ahead. The Autumn Statement, Hammond’s first since assuming the role in the Summer, marked a change in direction for UK policy.
There are a number of areas for investors seeking to benefit from new government spending priorities.
With the search for income a constant theme in recent years, investors could be able to find attractive yields backed by secure government spending.
Below FE Trustnet speaks with two specialist investment trusts about how investors can play the government spending theme.
Medicx
One area for investment trust investors to gain exposure to government spending and more reliable income is via investment in the public healthcare sector.
Property investment trust Medicx specialises in the UK health sector like its peer Target Healthcare Reit and has generated a return of 32.47 per cent over three years.
The Guernsey-domiciled closed-end fund invests in modern, purpose-built primary healthcare properties in the UK and Ireland. It aims to achieve rising rental growth income and capital growth from its portfolio of 151 properties.
Medicx performance over 3yrs
Source: FE Analytics
The trust has reported a dividend yield of 6.7 per cent in 2016. While down from 7.6 per cent dividend yield in 2015, it presents an attractive proposition for investors in the low rate environment.
The investment proposition presented by the sector has also seen increased interest from other investors, highlighted by the fund’s premium.
“There has been huge demand not just from the peer group, but other institutions looking a high quality, long-term income,” said Mike Adams, chief executive of Octopus Healthcare Group, investment adviser to Medicx.
“We are continuing to buy selectively, ensuring that we only buy assets that fall into our long-term core view of the NHS.”
The primary care sector is also likely to receive a boost with its portion of the total NHS budget to increase from 7 per cent to 11 per cent in the coming years.
With primary care trusts playing an increasingly important role in healthcare provision, providing better value for NHS trusts, which account for 90 per cent of all patient contact in the system.
Despite increased competition in the sector, the trust has around £58m potential UK acquisitions and a further €67m (£56m) in Ireland.
“We’ve made progress in the income space [where] rent is increasing ahead of balance sheet, we’ve made progress on our EPRA NAV, which has increased over the past six-month period,” said Andrews
However, writing in the fund’s annual statement Medicx chairman David Staples noted that there has been some discussion about converting the fund to a real estate investment trust (Reit) possibly on 1 October 2017.
Property investment companies can be tax inefficient and subject to corporation tax on income and capital gains tax. Special tax status for Reits means no corporation tax is paid on profits of rental business.
While a number of property-focused investment companies have converted to a Reit structure in recent years, investors may want to consider whether the structure is best suited to their needs.
GCP Infrastructure
Key among the announcements from the Autumn Statement was the establishment of the National Productivity Investment Fund, ostensibly to improve UK productivity but with several features relating to other infrastructure areas.
Infrastructure investment trusts have been among some of the main beneficiaries of the low yield environment in recent years. Stable income and compelling returns have contributed to a surge of interest in the sector more recently.
Indeed, Winterflood Investment Trusts recently labelled the sector as the “shining light” of the alternative income theme, although some social infrastructure funds ‘bond proxy’ characteristics have hindered performance more recently.
One of the beneficiaries of increased interest has been GCP Infrastructure, with the trust recently raising £90m from an oversubscribed placing.
Unlike other strategies, the trust invests in debt secured against long-dated, public sector-backed projects predominantly in the private finance initiative (PFI), renewable energy and social housing areas.
The closed-end fund has delivered a steady 7.6p per share dividend in recent years and a 2.05 per cent return in the 12 months to 30 September.
“Typically, people invest in GCP for income and that always been the case,” said Rollo Wright, lead partner at the trust’s investment adviser Gravis Capital Partners. “We’ve been paying 7.6p per year or more than four years. All our investors [have invested] with us for the sheer reliability and predictability.
“I wouldn’t claim that share price performance makes us unique in any way, if you add the peer group we have a had small rally. The sector has been a pretty defensive place to make money.”
As with many trusts focused on the infrastructure sector, GCP trades at a premium to NAV currently at around 15 per cent.
Discount/Premium of GCP Infrastructure over 5yrs
Source: FE Analytics
Wright says the long-term nature of the securities held by the fund give it interesting inflation-linked characteristics, particularly given the market outlook. Currently the fund has inflation protection for around 57 per cent of its portfolio.
The UK government’s focus on improving infrastructure also plays well for the fund, which will benefit from increased spending and new projects.
With former austerity policies all but abandoned in the UK, greater spending on high quality healthcare and infrastructure projects seems more likely in the near future. For those looking for secure income in the low rate environment, trusts with a focus on the sectors are likely to continue attracting government interest.