Utilico Emerging Markets 25 January 2023

Utilico Emerging Markets Trust (LON:UEM) offers a relatively unique proposition by being a closed-ended fund with a focus on utilities and infrastructure companies across the emerging markets, with a distinct bias towards Brazil and Latin America. The investment team are led by Charles Jillings at ICM Investment Management (see Management section). The team seek companies operating under established regulatory frameworks that provide essential services such as utilities and transportation networks, believing that companies with such characteristics will have lower associated risks. They take a total return approach, seeking companies with strong sustainable cash flows that are undervalued by the market, as well as those that can offer long-term growth. UEM is not benchmarked against any particular index, and so its portfolio positioning is therefore highly active if compared to the broad MSCI Emerging Markets Index or its sector peers.

As we show in the Performance section, UEM’s performance has been strong since its founding in 2005, as well as over the short term and medium term, with the trust beating the MSCI Emerging Markets Index and sector peers over those periods. The trust tends to be less volatile both to the downside and upside, something that may be expected from a portfolio with a heavy bias to utilities and infrastructure assets. Latin American companies have a tendency towards larger dividend yields, so the trust’s exposure to them, combined with its exposure to utilities and more growth-orientated markets such as India and Vietnam, gives it a good balance between income and growth. The trust’s current dividend yield is in the region of 3.7%.

UEM’s discount has remained stubbornly wide, averaging 12.8% over the past five years. The trust has an OCF of 1.4%, which is relatively high compared to the average of the sector; however, UEM has a specialist focus that differentiates it from its peers.

Through its specialist exposure to utilities and infrastructure and its bias to Latin America, we believe UEM offers a unique approach amongst its emerging markets peer group. We think the management team have added alpha as well, through identifying solid businesses that have been unappreciated by the market. Performance over the short, medium and long term has been good, with the underlying portfolio holdings demonstrating a degree of resilience to economic and market cycles.

There is the question of concentration risk, and from the outset investors should be aware that this is a fund which will focus solely on investing in utilities and infrastructure, much like a technology fund will focus on tech stocks. We believe the trust’s bias to Latin America and Brazil does add risk, but that it also brings differentiation. UEM takes a relatively lower weight to China, while the management team are excited by growth prospects in India and Vietnam and are seemingly intent on adding exposure there.

Despite the strong performance, attracting investors seems to be a challenge as the discount has remained stubbornly wide, even after years of buying back shares. However, the board is actively buying back shares at discounts wider than 10%, which could provide a degree of reassurance for investors. We believe UEM could benefit an existing emerging markets position, adding diversity and potential stability as well as a good balance between income and growth.