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10. Uncovering Trusts – UIL (UTL)
46 Plays4 months ago
In this episode, our director of content, investment trusts Milosz Papst explores UIL, an investment company whose aim is to maximise shareholder returns by identifying investments worldwide where the estimated underlying value is not fully recognised. He talks about ICM, the company’s investment manager, and its stock selection process based on the following three medium-term views: 1) the world’s financial markets are over indebted; 2) technological change offers strong investment upside; and 3) emerging markets offer better GDP growth opportunities than developed markets. He delves into UIL’s investment portfolio, including its four major platforms. He also comments on the company’s leverage, dividend policy and 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 Podcast
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting and investor engagement. Each episode, we will uncover the distinct features and latest developments of a selected listed investment company. Tune in and find interesting investment ideas and stay on top of what is happening in the investment company sector.
Meet UIL's Milosh Pabst
00:00:27
Speaker
I'm your host, Neil Shaw, and today I'm joined by Milosh Pabst. Director of Investment Trusts, Content Head Edison Group, who is going to talk about UIL, ticker, UTL. Milos, thanks for joining us. Daniel, thanks for having me. So UIL is an investment company that many listeners will not be familiar with. So to start off with, maybe you just want to give us a high level introduction.
UIL's Investment Strategy
00:00:51
Speaker
Yes, sure, absolutely. UIL was launched in June 2007 and this and Bermuda-registered company ah listed on both the specialist fund segment of the London Stock Exchange, which does not have any free-field requirements, and the Bermuda Stock Exchange. Manager Charles Gillings and his team at ICM, who also manage another of Edison's clients, Utilico Emerging Markets Trust, the UUM, um Aim to identify and invest in compelling long-term investments across the globe, where their forecast underlying values are not fully recognized. ah While it is not a perfect comparator, UIL's performance is benchmarked against the broad UK equity market. um Worth noting is that the company employs a levered strategy through zero dividend prefer preferent preference shares. and Its ZDP shares are listed on the standard segment of the main market of the London and Stock Exchange.
Expertise of ICM Fund Manager
00:01:44
Speaker
So could you tell me, give me a little bit more information about ICM? Yes, of course. um ICM is an international fund manager and corporate finance advisor. It is headquartered in Bermuda with 10 offices globally and more than $25 billion dollars of assets managed directly and in subsidiary investments. ICM has expertise in listed equity, but private equity, and fixed income income bonds, and invests in industries where the team has deep specialism and understands where it can add value. It focuses on opportunities that are under-researched, misunderstood, or structurally complex to access. um Essentially, ICM seeks to build significant positions, committing capital for the long-term in non-mainstream assets.
Stock Selection Focus Areas
00:02:29
Speaker
okay ah So I think you you started to provide some hints in terms of how you know the the companies come onto the radar screen. How does actually UIL l e select its investments? Yeah, so stocks are selected on a bottom-up basis following thorough fundamental research, taking into account the drilling's three medium-term views. The first view is that the world's financial markets are overindebted. Secondly, technological change offers strong investment upsides. And finally, emerging markets offer better GDP growth opportunities than developed markets. ah By the way, we have recently published a thematic piece on emerging markets where we elaborate in more detail on the economic growth outlook across emerging markets.
00:03:10
Speaker
and To reiterate, the manager focuses on long-term value creation, ah looking um through short-term stock price volatility.
Investment in Unlisted Securities
00:03:18
Speaker
okay so can you Now we understand how they're picking their investments. How do they actually go about then structuring their portfolios? um Yes, so, UIL does not only hold listed companies that can invest up to 25% of gross assets in unlisted securities at the time of investment. ah The fund sector and geographic exposure is unrestricted, but again, at the time of investment, a single investment may not exceed 30% of gross assets.
00:03:48
Speaker
um However, this excludes platforms which are portfolios of underlying investments, and this may not exceed 50%. UIL has holdings in four platforms. Summers covering financial services. Zeta Resources, which is a natural resources platform. um Another platform is the above-mentioned Utilico Emerging Markets Trust, which invests in emerging market infrastructure and utilities. And finally, Electors Capital, focused on Fintech. Combined, these four platforms make up the majority of the portfolio. um I believe that UIL has said the differentiated portfolio of assets ah with very different geographic and sector weightings compared with you know mainstream global equity indices. By geography, UIL's largest exposures are Australia, around 40%, and the UK, around 20%.
Platform Mandates
00:04:37
Speaker
While in terms of industries, the largest weights are financial services, around 50%, and technology, around 20%.
00:04:46
Speaker
Okay, that's that's interesting. And I find that interesting that the platforms make up the bulk of the portfolio. what What's the actual benefit of this approach for UIL? ah Well, to start with, um it is a focused strategy as each platform has a dedicated mandate with an objective of finding and implementing attractive investments within these remits. Each platform has a dedicated specialist analyst or analysts who spend their time gaining additional understanding on existing portfolio businesses and identifying compelling new investments.
00:05:20
Speaker
They are able to draw on UIL's financial backing and utilize ICM's deep knowledge across many jurisdictions to optimize investment opportunities. okay so Given a slightly unusual sort of fun breakdown, um maybe bring it to life by highlighting a few of UIL's largest holdings on a look-through basis.
Overview of Key Holdings
00:05:40
Speaker
Yeah, of course. Resimac Group is one of UIL's direct holdings and is also one of the largest positions in the Summers platform. It is a leading non-bank lending and multi-channel distribution business in Australia and New Zealand, which has been providing residential property finance since 1985.
00:05:58
Speaker
ah The company markets home loans under the parent company brand Resimac, via its distribution network of over 12,000 mortgage brokers in Australia and New Zealand. It also offers home loan solutions to borrowers directly in these countries. The company has a clear aim to grow and diversify its business by further enhancing its product and service offerings across its third-party broker but partners um and direct retail networks. Waverton Investment Management is summer's largest holding and is a UK-based specialist investment firm with around 15 billion pounds of assets under management and administration. It focuses on discretionary portfolio management for private clients, charities and institutions, plus a suite of in-house management investment funds.
00:06:45
Speaker
On 20th February of 2024, UAL announced that Samas had entered into an agreement which, subject to various conditions including regulatory approval, um will lead to the merger of Waverton with London and Capital Group. The transaction will result in Samas receiving two-thirds of its consideration in cash on completion, um together with a significant shareholding in the new combined business. Kumbia Bauxite Investments is the largest holding in the Zeta Resources platform. It is an unlisted company that owns the right to a future revenue stream from Alliance Mining Commodities, ah which operates the Kumbia Bauxite project project in the northwest of the Republic of Guinea. um This is a world-class Bauxite development with ah mineral content that makes it attractive for use in a low temperature, low cost refining process. Okay.
00:07:38
Speaker
um So now we understand um some of the sort of holdings, hopefully these holdings are actually generating income for the fund. What what is the company's dividend history and dividend policy?
Dividend Strategy & Yield
00:07:55
Speaker
So, UIL's dividends have remained steady for the last three financial years at eight pence per share. And the board anticipates that the annual distribution will will will at least be maintained using revenue and capital reserves when required. um I would note that the company now offers a very attractive above market dividend yield of around 8%. When I had a look, yeah UIL was trading at a pretty wide discount. What's the underlying reason for that?
Trading Discount & Debt Profile
00:08:23
Speaker
Yeah, that's correct. UIL's shares are trading at around the 40% discount on net asset value. As although the company's leverage has been reduced from more than 150% at the end of FY13, it remains relatively high, around 75%. The board is hopeful that over time, ah lower leverage could contribute to the company being afforded a higher valuation. It is also important to note that an investor in UIL effectively receives a double discount. For example, at the end of April 2024, Zeta Resources, which makes up around 15% of the fund, was trading it at an 18.8% discount to net tangible assets. And Utilico Emerging Markets, which represents 8% of the fund, was trading at a 17.5% discount to net asset value.
00:09:13
Speaker
OK, so given given the debt is ah that the debt profile is going to be sort of key to the the narrowing of the discount, maybe now is a good time to actually consider the debt profile in more detail.
Leverage & Redemption Strategy
00:09:25
Speaker
Could you outline that for me? Mm-hmm, sure. As mentioned earlier, the company's leverage is made up of ZDP shares. It has employed a strategy of issuing trashes with redemption dates spaced at two-year intervals um to ensure ah the portfolio is not disrupted, that trash is redeemed for cash. There were six redemptions between 2012 and 2022, and there are currently three trashes in issue, which are due for redemption in October 2024, 2026, and 2028. Okay.
00:09:57
Speaker
Milos, thank you very much. It's been a really interesting rundown of this.
Podcast Wrap-Up and Further Resources
00:10:01
Speaker
I would can describe this as a uniquely focused, value-focused investment company. ah Thank you very much for listening to Uncovering t Trust, a podcast by the Edison Group. If you want to find out more about UIL and the other investment companies we cover, please visit our website, which is w www.eddisongroup.com.