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34. Uncovering Trusts – Utilico Emerging Markets Trust (UEM) – Defensive emerging market exposure
91 Plays13 days ago
In this episode, our director of content, investment trusts Milosz Papst provides an overview of this specialist emerging markets trust which aims to generate an attractive long-term total return from a diversified portfolio of emerging market equities, primarily in the infrastructure, utility and related sectors. He outlines the four megatrends identified by ICM, the trust’s manager: social infrastructure, energy growth & transition, digital infrastructure, and global trade. He explains UEM’s focus on countries which exhibit positive attributes such as political stability, economic development, an acceptable legal framework, and an encouraging attitude to foreign investment. He highlights that the trust has recently become an AIC next-generation dividend hero. Finally, he elaborates on the trust’s discount to NAV.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to 'Uncovering Trusts'
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group. I'm your host, Will Manuel, and today I'm joined by Milos Papps, Director of Investment Trust Content at the Edison Group, who will talk about Utilico Emerging Markets Trust, whose ticker is UEM.
Overview of Utilico Emerging Markets Trust
00:00:21
Speaker
ah So Milos, thanks for joining us today. Hi Will, great to be back. Yeah, so um this is our first Utilico Emerging Markets Trust podcast. So I guess for those listeners less familiar with the company, it'd be good to have an introduction to the manager as well as the trust.
00:00:38
Speaker
ah Sure. Utilico Emerging Markets Trust has been managed by Charles Gillings at ICM ah since the fund was launched in July 2005. His colleague Jacqueline Bruce, ah who he has worked closely with for many years, was named as the Trust Co-Manager in January 2025.
00:00:57
Speaker
Now, ICM is a Bermuda-based fund manager and corporate finance and advisor with more than 80 employees who operate from 10 offices across the globe. The company specializes in listed equity, private equity, and fixed income bonds in sectors where its managers can can identify and add value, such as utility infrastructure, financial services, mining resources, and technology.
00:01:21
Speaker
ICM is a long-term investor and at the end of March 2025 had $1.2 billion dollars of direct assets under management.
Strategy and Focus of Utilico in Emerging Markets
00:01:31
Speaker
Okay, thanks. And um given that ICM is a niche manager, what areas does Utilico focus on?
00:01:39
Speaker
Yes, so let me maybe start by highlighting that Utilico was historically a Bermudan investment company but re-domiciled to the UK as an investment trust via a scheme arrangement in April 2018 and is listed on the main market of the London Stock Exchange.
00:01:53
Speaker
um Now its managers aim to generate an attractive long-term total return from a diversified portfolio of emerging market equities, primarily in the infrastructure, utility and related sectors.
00:02:05
Speaker
ah They are unconstrained by benchmark allocations, although the MSCI emerging markets index is used as a reference. um There are a series of internal investment guidelines to mitigate risk.
00:02:15
Speaker
um At the time of investment, there is a maximum percentage of gross assets as follows. in an individual investment, in a single country, twenty five percent in an individual sector and ten percent in unqued investments Right, and is there anything we should understand about how the managers think about investing in emerging markets?
00:02:38
Speaker
ah Indeed, you have touched on a very important aspect of the utility cost story. um The managers are positive on the outlook for emerging markets due to their above average growth prospects and subtract
Megatrends Influencing Utilico's Portfolio
00:02:49
Speaker
evaluations. They have identified four global megatrends that they believe will support the growth of the trust portfolio companies for many years to come.
00:02:58
Speaker
and The first is social infrastructure, which represents around 32% of the portfolio, which is based on the increased need for social infrastructure such as sanitation, water supply and transportation networks.
00:03:10
Speaker
um This is driven by a rising emerging market middle class with higher levels of disposable income and ongoing shift to urbanization. um A portfolio example is Manila Water, which operates across the water value chain from water source management through transmission, treatment and distribution to wastewater treatment.
00:03:29
Speaker
um Its main concession is in the Philippines, which expires in 2047 with a 12% guaranteed return on expenditures. The second megatrend is energy growth and transition, around 26% the portfolio.
00:03:42
Speaker
um which includes investments in renewable energy areas such as wind, solar and hydroelectric, as well as supporting grid infrastructure, ah which is required to support economic growth and increase energy security.
00:03:55
Speaker
An example of a company providing exposure to this theme is Electrobras, the largest utility company in Latin America and the leader in renewable energy. the Following privatization, the company has focused on internal restructuring and boosting investment capacity.
00:04:12
Speaker
The third theme is digital infrastructure, around 25% of the portfolio, ah which is required as digital connectivity investment is occurring very rapidly, um thereby driving strong demand for data centers.
00:04:25
Speaker
Here I would mention Sunivision, Hong Kong's leading data center operator with eight data centers and two cable landing stations spread across Hong Kong and serving different market requirements and price points.
Investment Approach and Stock Selection
00:04:38
Speaker
The company is building additional capacity to meet expected demand in 2026 2027.
00:04:45
Speaker
The fourth global megatrend is global trades, around 17% of the portfolio, which is expected to continue to grow regardless of President Trump's trade policies, with emerging markets making up an increasing share of global activity.
00:05:00
Speaker
ah Worth discussing in this context is Puraeus Port Authority, which is the concession owner of Puraeus Port, one of the largest transshipment ports in Europe.
00:05:11
Speaker
um Its business has recovered strongly from a difficult period in the second half of 2023. Thank you. That's ah very in-depth. That's great. So now we've got a broad understanding of Utilico. Let us move on and focus on the investment process.
00:05:28
Speaker
Okay, so the managers so the managers seek to identify investing companies which are trading at a discount to their estimated intrinsic value and which they believe have the potential to generate total returns of at least 15% a year at an investing company level over a five-year horizon.
00:05:45
Speaker
um They invest in emerging market countries with positive attributes such as political stability, um economic development, an acceptable legal framework, and an encouraging attitude to foreign investments.
00:06:01
Speaker
um As I mentioned earlier, the focus is on long-term investments, which avoids short-term stock market noise. What I find important is that the managers can draw on the expertise of professionals in ICM's regional offices, and they have direct relationships with companies and local brokers um who can highlight changes in business conditions.
00:06:21
Speaker
ah There is a lot of travel involved, including meeting with company management and visiting their operating assets. Right. So umm following on, it'll be interesting to have some more detail about stock selection and Utilico's portfolio.
00:06:36
Speaker
Of course. ah The managers select stocks on a bottom-up basis following thorough fundamental research, including the construction of a detailed financial model and valuation targets from an investable universe of more than 1,000 companies.
00:06:49
Speaker
There are around 70 holdings the portfolio compared with you know a typical range of 60 90.
00:06:56
Speaker
UEM has an active share approaching 100% versus the MSCI emerging markets index. and Just to give our listeners some background, um this is a measure of how we fund differs from an index with 0% representing full replication and 100% commonality.
00:07:12
Speaker
up the you know The high active share is unsurprising as Utilico is a specialist investment trust and the managers select stocks without reference to index allocations.
00:07:23
Speaker
um At the end of April 2025, Utilico's 10 largest holdings made up around 40% of the portfolio, and its largest sector exposures were electricity, 18%, water and waste, 17%, and digital services and digital infrastructure, 14%.
00:07:42
Speaker
ah By geography, the largest weightings were Brazil, 24% versus just 4% in the MSCI Emerging Markets Index, and China, including Hong Kong, to which UEM has only a 12% exposure versus 31% in the
Performance and Yield of Utilico
00:07:55
Speaker
index.
00:07:55
Speaker
Okay, thank you. So um now should we move on to performance? ah Yes. As discussed previously, the MSCI Medium Markets Index is used as a reference, and Utilico does not have a full benchmark.
00:08:08
Speaker
Because of the nature of the trust investments in companies providing essential services, Utilico has tended to um well underperform the index during a cyclical upturn led by sectors such as tech technology and consumer discretionary ah while outperforming in a folding market.
00:08:26
Speaker
Importantly, the trust has outpaced the performance of the index over at last three and five years and meaningfully since inception in both NAV and share price terms. From launch to the end of April 2025, Utilico's NAV total return has compounded at an annual rate of 8.8%.
00:08:43
Speaker
Okay, that's impressive. And what about dividends? i would have thought that the nature of Utilico's investments would mean the trust offers a decent yield. Yes, you are correct. More than 80% of portfolio companies pay dividends, which has allowed Utilico to increase its annual distribution every year for the last 10 years.
00:09:02
Speaker
ah This means that the Trust is now one of the AAC's next generation dividend heroes, and notably the only member of the AAC's global emerging markets sector to have done so.
00:09:13
Speaker
Utilico's dividend is fully covered and equates to a yield of around
Market Conditions and Utilico's Position
00:09:17
Speaker
4%. Okay, ah that's that's decent. um We're close to the end of our session today, so ah please could we focus on utility code evaluation?
00:09:27
Speaker
but This is an important consideration for this trust. In the current uncertain macro environment, it is unsurprising that Utilico is trading a discount. However, what I find difficult to understand is why the trust discount is wider than the discounts of most of its emerging market peers.
00:09:44
Speaker
um The nature of the trust assets means that its investing company's earnings and cash flows should hold up relatively better during a global economic down to slowdown. um The current discount of around 12% is above the board's desired sub 10% level.
00:10:00
Speaker
ah Shares are generally repurchased when the discount has widened to more than 10% in normal market conditions. Right. um And is is there anything further you'd like to add?
00:10:13
Speaker
Yeah, so in the current environment, as there are question marks around the US being the go-to area of investment due to President Trump's policies, um now could be an opportune time to consider emerging markets.
00:10:24
Speaker
Looking at Utilico in particular, many of its investments have a domestic or regional focus and so should be relatively insulated from US tariffs. um The trust managers have reported that Utilico's portfolio companies are performing well with top-line growth and margin expansion.
00:10:41
Speaker
And note that in general, they have been able to successfully execute the business strategies of the years, despite regular political and inflation risks, which should but stand them in good stead for today's environment.
00:10:53
Speaker
Okay, well, that was an extremely informative rundown on this specialist emerging trust. Thanks, Milosz, and look forward to our next discussion. You're very welcome. Speak soon.
00:11:04
Speaker
So you've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about Utilico Emerging Markets and other investment companies we cover, please visit www.edisongroup.com.