One of the best investment trusts for emerging market investors

The Utilico Emerging Markets investment trust focuses on infrastructure, an area its competitors often ignore.

Manila International Container Terminal © Brent Lewin/Bloomberg via Getty Images
International Container Terminal Services is the fund's largest holding

Manila International Container Terminal © Brent Lewin/Bloomberg via Getty Images

The last year has been dismal for emerging market stocks, with the corresponding MSCI index returning 2%. Investors in investment trusts, however, have fared well: the JPMorgan trust (LSE: JMG) has returned 13%, Genesis (LSE: GSS) 14% and Utilico Emerging Markets (LSE: UEM) 19% over 12 months. UEM, moreover, has had no help from the Chinese internet stocks that have bolstered emerging markets' performance in recent years.

Advertisement - Article continues below

UEM, with a market value of £540m and assets of £600m, invests mostly in the infrastructure, utility and related sectors. Manager Charles Jillings points out that "delivering GDP growth requires investment in infrastructure assets. [Those] we invest in should continue to deliver... sustainable income streams, resulting in rising dividends... Moreover, one of the strengths of infrastructure investment is high operating leverage": additional volumes trigger a disproportionate increase in profits.

A benign backdrop

Emerging markets currently account for 40% of global GDP, a share that is expected by Oxford Economics to rise to 57% by 2040, and 87% of the world's population. The drivers of economic growth are urbanisation, the growth of the middle class and technology. UEM cannot invest directly in technology but "it is an asset in driving value in the sector". While much of the sector is mature in developed markets, growth is much more pronounced in emerging economies.

Advertisement - Article continues below

The portfolio covers energy (gas, electricity and renewables, both generation and transmission), transport (ports, airports, roads and rail), water and telecoms. The top 20 holdings account for 59% of the portfolio with the largest (International Container Terminal Services) worth 6.6% of the total. Portfolio turnover is estimated at around 20%, much of it, in the last three years, due to exposure to Latin America rising from around 15% of the portfolio to over 40%, mostly in Brazil. "We are optimistic," says Jillings, "owing to the positive impact of President Bolsonaro, notably on pension reform, deregulation of airlines and increased stockmarket flotations."

Advertisement - Article continues below

Exposure to Argentina however, has been cut back. "We were hopeful when Macri came to power and invested 4% of the portfolio," says Jillings. "This grew to 10% but we sold down to 2.5% owing to our political concerns before the primary elections in the summer. Now we are nearly out."

The management team visits all the investee companies and many others besides. This is time-consuming and expensive but the annual management fee is only 0.65%. There is a performance fee too but the ongoing charges are still only around 1%.

Expect a higher dividend

The cash-flow of the companies in the portfolio and the dividends they pay enabled UEM to increase its dividend, fully covered by earnings, by 2.9% to 7.2p in the year to 31 March. With the shares at just under 240p on a 12% discount to net asset value, this means a dividend yield above 3% with a further increase all but certain this year. Jillings describes the persistent discount, which triggered the buy-back of 4.7 million shares last year, as "frustrating", but for new investors it is an opportunity.

UEM's annualised investment return since launch in 2005 has been over 11% and Jillings says "we are as excited about the prospects now as we were at launch", helped by the long-term growth of emerging economies. With buybacks preventing the discount from rising but the potential for it to fall when the current apathy of UK investors diminishes, the shares remain attractive for yield, for capital return and for the trust's focus on an attractive sector that other emerging market funds usually miss.



Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020

Most Popular


House price crash: UK property prices are falling – so where next?

With UK property prices falling for the first time in eight years, are we about to see a house price crash? John Stepek looks at what’s behind the sli…
2 Jul 2020

The end of the bond bull market and the return of inflation

Central bank stimulus, surging post-lockdown demand and the end of the 40-year bond bull market. It all points to inflation, says John Stepek. Here’s …
30 Jun 2020

How can markets hit new record highs when the economy is in such a mess?

Despite the world being in the midst of a global pandemic, America's Nasdaq stock index just hit an all-time high. And it's not the only index on a bu…
3 Jul 2020