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55. Uncovering Trusts – Utilico Emerging Markets Trust (UEM): Riding infrastructure megatrends across emerging markets
108 Plays10 days ago
In this episode, our director of content for investment companies, Milosz Papst, talks about Utilico Emerging Markets Trust (UEM), a specialist investment trust focused on infrastructure and utility companies across emerging markets. He introduces the trust and its managers' long-term, bottom-up investment approach – a concentrated portfolio of around 70 holdings managed by Charles Jillings and Jacqueline Broers at Bermuda-based ICM. Milosz outlines the portfolio's four key investment themes: social infrastructure, energy growth and transition, digital infrastructure, and global trade. He discusses the investment case behind each, including highlighted holdings such as Brazilian water utility Sabesp, renewable energy giant AXIA Energia, Chinese data centre operator GDS Group and Philippine port operator International Container Terminal Services.
Turning to performance, Milosz covers the trust's strong long-term track record, with an annualised NAV total return of close to 10% since launch in 2005 and encouraging more recent results in Q126, supported by the trust's sizeable Brazil exposure. He also highlights UEM's progressive dividend policy, noting that the trust is the only AIC Global Emerging Markets fund designated as a next-generation dividend hero, with more than 10 consecutive years of dividend growth.
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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 around 50 investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to the Podcast
00:00:06
Speaker
Welcome to Uncovering Trusts, the Edison Group podcast where we explore some of the most interesting investment trusts on the market.
Overview of UEM Trust
00:00:12
Speaker
I'm your host, Liam O'Byrne, and today I'm joined by Milos Papps, Director of Investment Company Content at Edison, to discuss our recent review on Utilico Emerging Markets Trust, ticker UEM. Milos, thank you very much for joining us today.
00:00:27
Speaker
Thanks, Liam. This is always an interesting trust to talk about. So just to kick off the conversation today, could you perhaps start with a brief introduction to the trust, given the efforts that the company has already made in recent years to bring their story to a wider audience?
Historical Background of UEM
00:00:43
Speaker
Yes, I agree. um The trust was launched in July 2005 as a Bermudan investment company, which re-domiciled the UK as an investment trust in April 2018. The portfolio is predominantly made up of em emerging market infrastructure and utility companies.
00:01:01
Speaker
Since launch, UEM has outperformed the MSCI emerging market index by, well, a considerable margin. and The Trust is managed by Bermuda-based specialist manager ICM Group, which had around $1.4 billion dollars of assets under management at the end of 2025.
Management Team Update
00:01:18
Speaker
ICM has more than 80 employees who operate from 10 offices around the globe.
00:01:23
Speaker
Charles Jennings has managed UEM since launch, and Jacqueline Burrs was appointed joint portfolio manager at the beginning of 2025. having been involved with the Trust since joining ICM in 2010.
00:01:38
Speaker
Great. So what is the manager's investment approach?
Investment Strategy and Guidelines
00:01:43
Speaker
Yes, so UEM's portfolio contains around 70 Gillings & Burr's most compelling investment ideas. They and the rest of the ICM specialists have worked together for many years. The team believes that it has unparalleled sector knowledge, which it sees as an advantage when holding investee companies to account.
00:02:03
Speaker
Gillings and Burst employ a fundamental fundamental stock selection process and are unconstrained by benchmark allocations, although the MSCI emerging markets index is used as a benchmark.
00:02:15
Speaker
To mitigate risk, there is a series of internal investment guidelines in place um as a maximum percentage of gross assets at the time of investment. um Individual investment 10%, single country 35%, individual sector 30%, unquoted investments 10% and top 10 holdings 60%. Gearing of up to 25% of gross assets is permitted and currency exposure is unhatched.
00:02:42
Speaker
Great. And can we now drill down into a bit more detail about how UEM's portfolio is
Focus on Long-term Investment Opportunities
00:02:48
Speaker
managed? and The managers invest for the long term, avoiding short term stock market noise, um seeking companies that are trading at a discount to their estimated intrinsic value, and that they believe have the potential to generate total returns of at least 15% per year at investing company level over a five year horizon.
00:03:09
Speaker
um Preferred emerging market countries foreign investment have positive attributes such as political stability, strong economic development, an acceptable legal framework and an encouraging attitude to foreign investment.
00:03:23
Speaker
ah Direct relationships with companies and local brokers can highlight changes in in business conditions. um There is a lot of travel involved, meeting with company management and their operating assets, along with other contacts across the emerging regions.
00:03:41
Speaker
ICM is often the first phone call when an infrastructure or utility IPO is announced, and its investment specialists are used as you know sounding boards ahead of companies listing. ah UEM's investment team is supportive of its investment investee firms in terms of their um capital requirements by participating in follow-on equity offerings at the right price, and given its specialty, the trust is often a well-regarded shareholder for many of its investee companies.
Stock Selection and ESG Considerations
00:04:10
Speaker
Stocks are selected on a bottom-up basis following thorough fundamental research, um including the construction of a detailed financial model and valuation targets from an investable universe of um more than 1,000 companies.
00:04:24
Speaker
While UEM is not an ESG fund, its board believes it is in shareholders' best and best interests to consider um environmental, social, and governance factors when selecting and retaining investments.
00:04:38
Speaker
um ICM is a signatory to the United Nations supported principles for responsible investments, um a code of best practice for incorporating yeah ESG issues.
00:04:48
Speaker
Great.
UEM's Market Position and Portfolio Characteristics
00:04:49
Speaker
Now, returning to a higher level view, in essence, what does UEM offer investors? Well, in the briefest terms, the Trust offers differentiated exposure to above average economic growth in emerging markets. In August 2025, UEM's board announced a series of measures aiming to and enhance the Trust's performance and narrow the discount.
00:05:10
Speaker
These were a new performance-based tender offer, regular share buybacks, progressive dividend policy, and bringing forward the 2026 continuation vote, which was subsequently passed with a 97.6% vote in favor of the company's continuation.
00:05:26
Speaker
The next vote is in 2030, providing the managers with a good opportunity to build on their positive long-term performance record. Moving on to the portfolio then, are there any key features or holdings that you'd like to highlight?
00:05:40
Speaker
Well, firstly, it is important to bear in mind that UEM's portfolio is relatively defensive with a beta of around 0.8%, given the nature of its investments in infrastructure and utility assets.
00:05:53
Speaker
Currently, UEM regularly discloses its top 30 positions. The board has decided to further increase transparency by including a full holding list in the annual and half-year reports.
00:06:05
Speaker
um There is also a commitment, except in you know exceptional circumstances, to only invest in listed companies. Unlisted businesses currently make up, well, a modest around 1.5% of the trust portfolio.
00:06:20
Speaker
um At the end of April 2026, UEM's top 10 holdings made up 42.9% of the portfolio, with the top 30 holdings making up 77.5%. um A couple of relatively new top 10 positions are Grupo Aeroportuaro del Pacífico and Colbon.
00:06:37
Speaker
GAP is the largest Mexico-listed airport operator with 12 airports in Mexico, including five of the 10 most important and two in Jamaica.
00:06:49
Speaker
GAP also operates Cross Border Express, which is a pedestrian bridge connecting a terminal in San Diego, US, i'm directed to the Tijuana International Airport in Mexico, accounting for more than 30% of total Tijuana traffic.
00:07:04
Speaker
In November 2025, GAP proposed a business combination to integrate the CBX operations, which is expected to conclude in Q2, 2026. Holborn is the second largest energy generator in Chile, with a 14% market
00:07:19
Speaker
and the fifth largest in Peru with a 6% market share. The company has installed capacity of 5 gigawatts, 57% renewables hydro and wind solar with thermal.
00:07:38
Speaker
um which is split between Chile, 89% of capacity and 86% of revenue on EBITDA, and Peru, um which accounts for 11% of capacity and 14% of revenue on EBITDA.
00:07:51
Speaker
um Having sold its energy transmission business in 2021, Colbon is a pure play power generation company with a highly regarded successful management team. The company is trading on an undemanding valuation and has an attractive dividend yield.
00:08:06
Speaker
Now, UIM's portfolio is very different to the MSCA emerging markets index, um illustrated by an active share of around 98%, which is a measure of how the fund differs from its benchmark index with 0% representing full index replication and 100% no commonality.
00:08:25
Speaker
um The high active share is, well, of course, not surprising given UEM's specialist mandate and fundamental stock selection. ah Notable differences between the trust portfolio and the MSCA emerging markets index include the trust's lack of financial stocks, which make up more than 20% of the index.
00:08:43
Speaker
UEM's largest country exposure by a wide margin and is Brazil, which makes up more than a quarter of the portfolio, but only around 5% the index. Now, we've talked in the past about the four global infrastructure megatrends that UEM's managers believe will support the growth of the trust's investee companies long into the future.
00:09:01
Speaker
it's i think it's probably worth revisiting these today. Could you perhaps provide a portfolio example of each trend?
Sector Focus: Infrastructure and Utilities
00:09:08
Speaker
Yes, of course. um At the end of April 2026, the portfolio was broken down as follows. um Social infrastructure accounted for 36.8%. There is an increased need for so for social infrastructure such as sanitation, water supply and transportation networks. um Demand is driven by a rising emerging market middle class with higher levels of disposable income and the ongoing shift to urbanization. CABESP is a Brazil-listed major global water utility, ranking second globally by revenue and third by third population. The 2024 privatization reduced the government's stake from just over half to 18%,
00:09:51
Speaker
um Equatorial Energia acquired a 15% stake and is a well-regarded reference shareholder. Tabesp owns a 93,500 km water supply network serving million customers, which represents coverage
00:10:09
Speaker
3.9 thousand kilometers sewage network serving 24.9 million customers, which is a 94.8% coverage with a higher sewage treatment rate than the national average across 376 municipalities in Brazil's richest state, Sao Paulo.
00:10:24
Speaker
The company is benefiting from a favorable regulatory environment and has planned capex over the next five years that will approximately double its asset base without affecting its debt ratios. Sebesp is well positioned in Brazil's sanitation sector and can potentially expand to other Brazilian states that have low sanitation indicators even before reaching universal coverage in Sao Paulo.
Renewable Energy Investments
00:10:48
Speaker
um second um is the the second The second main theme is energy growth and transition, which represents 28.6% of the portfolio um and includes you know investment in renewable energy areas such as wind, solar and hydroelectric, as well as supporting grid infrastructure um required to support economic growth and increase energy security.
00:11:10
Speaker
Axia Energia is the largest Latin American utility company with power generation and transmission assets in Brazil. It's installed capacity of 44 gigawatts, which is 17% share in Brazil.
00:11:24
Speaker
is um yep one hundred percent from renewable sources um Axio operates um close to 75,000 kilometers of transmission lines, which represents a 37% share in Brazil. The company privatized in 2022 with no shareholder holding more than 10% of the voting power, despite the government retaining a 43% stake.
00:11:55
Speaker
Since privatization, Axia has focused on um simplifying its administrative structure, enhancing asset management, internal restructuring and boosting capacity investment.
00:12:06
Speaker
It is currently well positioned as it has the benefit of holding a significant amount of uncontracted energy in an environment of rising electricity prices.
Digital Connectivity Investments
00:12:17
Speaker
Now the third team is digital infrastructure, 19.9% the portfolio. ah which involves ah you know digital connectivity investments, which is occurring very rapidly, driving strong demand for um you know data centers.
00:12:35
Speaker
An example of a company in this area is GDS Group, which builds and operates data centers in mainland China, mostly in prior locations around Beijing, Shanghai, the Greater Bay Area, and the Chengdu-Chengen area.
00:12:47
Speaker
At the end of 2025, the company had 98 installed data centers with 1,735 megawatts of capacity, including construction.
00:12:59
Speaker
GDS has secured an additional 3,700 megawatt power quota with land allocations, mainly in Western China, which could be deployed over the next three years.
00:13:10
Speaker
The company primarily built builds and leases out whole build to suit data centers for hyperscalers such as Alibaba, ByteDance and Tencent on 10 to 15 year contracts um with 80% of data center revenues.
00:13:27
Speaker
um Now, AI-related demand is strong. GVS won 281 MW of new orders in 2025. The company's modular build-at-scale approach allows it to deliver data centers to clients in months rather than years at a competitive price.
00:13:45
Speaker
GVS also has a stake in day one, which is an international data center operator headquartered in Singapore with assets principally in Johor, Malaysia. GDS values its day one stake at $2.2 billion dollars based on a January 2026 Series C funding round and the company may list during
Global Trade Investments
00:14:03
Speaker
2026.
00:14:03
Speaker
twenty twenty six And then the fourth theme is global trade, representing 14.7% of the portfolio. um Global trading activity is expected to continue regardless of President Trump's trade policies with emerging markets making up an increasing share of global activity.
00:14:21
Speaker
um An example of a company ah in this area is International Container Terminal Services, ICT, which is a very long-term portfolio holding. It is a Philippine-listed global developer, manager, and operator of port terminals with a focus primarily on emerging market origin origin and destination ports, where volumes are less volatile than for trans-shipment ports.
00:14:46
Speaker
ah Having started operating in 1988, ICT now owns 33 container terminal concessions across 19 countries and remains circa 62% owned by the Ryerson family.
00:14:59
Speaker
Geographically, operations are split as follows. Asia represents around 53% of volumes, including 25% at the flagship Manila asset. and around 41% of revenue. Americas make up 29% of volumes and 40% of revenue. And EMEA, which represent represents around 18% of volumes and revenue.
00:15:22
Speaker
um The company has long-term concession agreements for port assets that are well positioned to capture economic growth from growing emerging markets. um Then ICT is benefiting from margin expansion led by operational efficiencies, tariff increases and operating leverage.
00:15:40
Speaker
It has a strong management team with a history of successful execution. And and in December 2025, ICT signed a 25-year partnership contract to manage Durban's container terminal, which is an asset requiring operational improvement, but will benefit if ships are rerouted around the Cape of Good Hope due to the war in the Middle East.
00:16:02
Speaker
Fantastic. Some really interesting companies there.
Performance and Returns
00:16:05
Speaker
Turning to performance then, could you perhaps now walk us through UEM's record both over the long term and also more recently?
00:16:14
Speaker
Sure. um Because of the nature of UEM's investments in companies providing essential services, the Trust has, well, tended one to underperform the um MSCA emerging markets index during a cyclical upturn led by sectors such as technology and consumer discretionary while outperforming in a folding market.
00:16:31
Speaker
UEM has a long-term record of outperformance versus the index and since launch has generated a strong average NAV total return of 9.7%.
00:16:40
Speaker
Now looking at more recent results, the managers were encouraged by the Trust's performance at the end of March 2026 with its NAV outperforming in Q1 26 and was and and well was broadly in line with a very strong MSCI Imager Markets Index over the last year.
00:16:57
Speaker
EUM benefited from its large exposure to Brazil as in Q1, 2026, both Brazilian stocks and its currency rallied, held by higher commodity prices and expectations for interest rate reductions. Portfolio companies that have performed particularly well include water a treatment business, Horizon Valoriza Zone Residuos, which is now the largest holding, approaching 10% of the fund.
00:17:22
Speaker
and Manila Water Company and electricity companies Alupa Investimento and Axia Energia. Unfortunately, April 2026 proved to be a tougher month as although UEM delivered a positive NAV total return, it could not keep up with a significant 11.3% monthly return in the MSCI Margin Markets Index, which um pretty much recovered the weakness in the previous prior month.
00:17:46
Speaker
um There was a strong rebound in sentiment regarding AI related stocks. um However, it is important note that in recent months UEM's performance has been much less volatile than that then the index returns.
Dividend Strategy and Recognition
00:17:59
Speaker
Great. And moving on to dividends, are they an important element of UEM's total returns? Yeah, that's a good point, Liam. um More than 80% of portfolio companies pay dividends with over 10 years of consecutive dividend growth. UEM is the only fund in the AAC global emerging market sector that that is designated as an AAC next generation dividend hero.
00:18:20
Speaker
and So far, three FY26 dividends have been paid, totaling 7.165 pence per share. um If the pattern of dividend payments continues in line with FY25, the total FY26 dividend will be 9.585 pence per share, which would be a 5% increase year-on-year and um higher than the 5 and 10-year compound annual dividend growth rates of 4.3% and respectively. and Could you perhaps also touch on UEM's valuation and gearing and
Discussion on Financial Metrics
00:18:54
Speaker
fees?
00:18:54
Speaker
Okay, let us start with UEM's discounts. As discussed earlier in August 2025, the Trust Board provided an update on proposals to increase demand for UEM's shares, which over time should lead to a narrowing of its discount.
00:19:08
Speaker
There is a performance-based conditional tender offer with UEM benchmarked against the MICI Emerging Markets Total Return Index. um Performance is measured over five-year period. Up to 25% of the company's issued share captain may be tendered if the trust underperforms the index in the five years ending the 31st of March, 2030. The share repurchase program continues with the with the aim of, you know,
00:19:34
Speaker
UEM achieving and then maintaining a single-digit discount in normal market conditions. Also, the Trust's annual dividend will continue to grow, um yeah as i as as i said recently As I said previously, the next continuation vote will be in 2030.
00:19:50
Speaker
And just a quick reminder that the 2025 vote passed with around 98% in favor of UEM continuing. Now, in recent months, UEM's discount has narrowed meaningfully. While this is a positive move, given the trust's more than respectable performance record and the style of its investments, um I find it surprising that UEM's discount is wider than most of its peers.
00:20:12
Speaker
During FY26, ending on the 31st of March, um around 11 million shares were repurchased, which was equivalent to around 6% of the share base.
00:20:23
Speaker
Moving on to Gearing, on the 30th August 2024, UEM entered into a £50 million multi-currency revolving credit um secured bank facility agreement with Barclays Bank.
00:20:36
Speaker
The initial turn was one year and the trust has an option each quarter to request an extension to the expiry date of the facility. um And the current expiry date is the 28th of February, 2027.
00:20:47
Speaker
um At the end of April 2026, UEM had a net cash position of 0.6%.
00:20:54
Speaker
Now, in terms of fees, ICM is paid a management fee of 1% of UEM's NAV to £500 million, 0.9% above £500 million up £750 million, 0.85% above £750 £1 billion and opened eight five percent above seven seven hundred and fifty pounds up to one billion and opened seventy five percent above one billion A tiered fee structure allows shareholders to benefit from the increasing economies of scale that a large portfolio provides.
00:21:22
Speaker
In H1 2026, UEM's ongoing charge ratio was 1.5%, which was in line with FY25. And the board remains focused on you know regularly assessing the trust service providers and fees.
Confidence in UEM's Future
00:21:36
Speaker
Thanks, Milos. Now, having covered all of the key areas of the UEM story, could you perhaps wrap up the discussion today by just summarizing your thoughts on this trust?
00:21:48
Speaker
Yes, of course. um The managers continue to have a high level of conviction in the in the you know positive prospects for the trust investee companies, which are selected via diligent bottom-up investment process.
00:22:00
Speaker
UEM has delivered very commendable results over the long term. Since launch in July 2005 until the 30th of April 2026, the trust has generated a very commendable annualized NAV to the return nearing 10%. The trust has a progressive dividend policy, a fully covered annual distribution and an above market dividend yield.
00:22:20
Speaker
Given the current very uncertain investment backdrop, UEM's differentiated resilient portfolio of essential assets held by companies with strong market positions, sustainable cash flows and well-regarded management teams should look increasingly appealing to global investors.
00:22:35
Speaker
Perfect. Thank you very much, Milos. Unfortunately, that is it for today.
Conclusion and Farewell
00:22:40
Speaker
But as a reminder, we now have more than 50 episodes that we've recorded in the Uncovering Trust series, all of which are available free from your usual podcast provider.
00:22:50
Speaker
You've been listening to Uncovering Trusts, a podcast by Edison Group. For more information on Utilico, Emerging Markets Trust and other investment companies we cover, please visit www.edisongroup.com.