Utilico Emerging Markets Trust — Emerging market growth opportunities at a discount

Utilico Emerging Markets Trust (LSE: UEM)

Last close As at 20/06/2024

GBP2.21

2.00 (0.91%)

Market capitalisation

GBP419m

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Research: Investment Companies

Utilico Emerging Markets Trust — Emerging market growth opportunities at a discount

Utilico Emerging Markets Trust (UEM) is managed by Charles Jillings, together with deputy portfolio managers Jacqueline Broers and Jonathan Groocock, at specialist investor ICM. Jillings is frustrated by the trust’s wide discount, which he believes does not accurately reflect UEM’s strong past performance and future growth prospects. The fund has a consistently low beta and has outperformed the MSCI Emerging Markets Index over the past one, three, five and 10 years due to successful stock selection. Jillings and his team are investing in the growth potential from four megatrends: energy transition, digital infra, global trade and social infra. They seek undervalued real assets with robust growth profiles, strong cash flow generation and attractive dividend yields. Since inception in 2005, UEM’s NAV has compounded at 9.3% per year.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

Utilico Emerging Markets Trust

Emerging market growth opportunities at a discount

Investment trusts
EM infrastructure and utilities

14 September 2023

Price

220.0p

Market cap

£436m

Total assets

£518m

NAV*

258.2p

Discount to NAV

14.8%

*Including income. At 11 September 2023.

Yield

3.9%

Ordinary shares in issue

198.3m

Code/ISIN

UEM/GB00BD45S967

Primary exchange

LSE

AIC sector

Global Emerging Markets

Financial year end

31 March

52-week high/low

232.0p

200.0p

NAV* high/low

268.6p

231.4p

*Including income

Net gearing (at 31 August 2023)

1.2%

Fund objective

Utilico Emerging Markets Trust’s investment objective is to provide long-term total returns by investing predominantly in infrastructure, utility and related equities, mainly in emerging markets.

Bull points

Specialist fund investing in high-quality emerging market companies, with 9.3% annual total returns since the fund’s inception in 2005.

Progressive dividend policy and attractive yield.

Higher economic growth and lower valuations in emerging versus developed markets.

Bear points

Discount persistently wider than board’s desired level of 10%.

The MSCI Emerging Markets Infrastructure and Utility indices have underperformed the MSCI Emerging Markets Index over the long term.

Emerging market indices can be more volatile than those in developed markets.

Analyst

Mel Jenner

+44 (0)20 3077 5700

Utilico Emerging Markets Trust (UEM) is managed by Charles Jillings, together with deputy portfolio managers Jacqueline Broers and Jonathan Groocock, at specialist investor ICM. Jillings is frustrated by the trust’s wide discount, which he believes does not accurately reflect UEM’s strong past performance and future growth prospects. The fund has a consistently low beta and has outperformed the MSCI Emerging Markets Index over the past one, three, five and 10 years due to successful stock selection. Jillings and his team are investing in the growth potential from four megatrends: energy transition, digital infra, global trade and social infra. They seek undervalued real assets with robust growth profiles, strong cash flow generation and attractive dividend yields. Since inception in 2005, UEM’s NAV has compounded at 9.3% per year.

UEM’s NAV outperformance vs the MSCI Emerging Markets Index (last 3Y)

Source: Refinitiv, Edison Investment Research

Why consider UEM?

Led by Jillings, UEM is managed by a highly seasoned team. Its three senior members have subsector specialism: Jacqueline Broers (transportation), Jonathan Groocock (utilities) and Mark Lebbell (digital infra). They have all worked together for more than a decade and there is very active discussion within the team and ‘competition for capital’ between existing and potential new holdings in the fund. When making investments, the team is able to take a long-term perspective so can buy assets at compelling valuations and wait for the value to be realised.

Emerging markets have above-average growth prospects – by 2050, total GDP in emerging markets is widely forecast to exceed that in developed markets. They also look very attractively valued on both an absolute and relative basis.

Strong cash flow generation at portfolio companies supports UEM’s growing income stream; c 80% of investee firms pay a dividend. The trust’s dividend, which is paid quarterly has been fully covered since FY16, even throughout the global pandemic, and has compounded at a c 4% annual rate over the last five years.

Despite UEM’s favourable growth and performance attributes, the trust’s discount is persistently wider than the board’s desired maximum of 10%. It is also wider than its historical averages over the last one, three, five and 10 years, providing real scope for a higher valuation once investors become less risk averse in a more settled macroeconomic environment.

Utilico Emerging Markets Trust is a research client of Edison Investment Research Limited

UEM: A specialist emerging market fund with a robust performance record

Emerging markets offer above-average growth prospects, especially countries such as India, China and Vietnam. This potential is being unlocked as many governments have a clear vision. As an example, India is investing in infrastructure and education to enable it to compete globally; this is an ongoing process. There is now a special freight corridor, which enables goods to be moved around the country on dedicated service lines resulting in faster and more efficient transportation. Historically freight was transported on the same lines that service passenger trains, which was very slow and was given lower priority than passenger travel. As well as being quicker, freight corridors mean manufacturers can hold less inventory as their supply chains are now more robust. It is not yet ‘just in time’ inventory management but the process is contributing to the whole world becoming more efficient.

Megatrends driving upside in emerging markets

UEM’s investments can be classified within one of four megatrends that are driving the growth potential in emerging markets.

Energy transition (37.2% of the portfolio at end August 2023) – lower or net-zero emission targets to combat climate change require decarbonisation of the energy matrix. Geopolitical concerns are driving energy security higher up the agenda as countries look to cut reliance on imported oil/gas. Huge investment in wind/solar assets and supporting grid and battery storage infrastructure are underway across emerging markets. In addition, dirty coal- and oil-fired assets are being displaced with cleaner and more flexible gas-fired facilities.

Digital infra (21.7%) – data drives innovation, enables personalisation and enhances decision making, driving social and commercial returns. Technology facilitates emerging market companies to market and deliver goods and services to a potentially global customer base. New innovative and disruptive applications developed in emerging markets are driving new business models and efficiencies.

Global trade (20.9%) – emerging market economies offer strong domestically driven growth, as well as a growing share of world exports driving international trade. The increasingly multi-polar world and the reshaping of the competitive environment will provide emerging market countries with new opportunities. As a result of COVID-19 and recent geopolitical pressures, there has been an increase in nearshoring and the need to diversify supply chains. As an example, new capacity is being built outside China, Apple is investing in manufacturing capacity in Vietnam, while Tesla has announced that it will set up a manufacturing hub in northern Mexico. Mexico has now overtaken China to become the largest exporter to the United States.

Social infra (20.2%) – most emerging market countries lack adequate essential social infrastructure. The growing middle classes in these countries are demanding better quality services and infrastructure. Rapid urbanisation is driving the need for huge investments in infrastructure, such as sanitation and electricity connectivity, as well as improved transport links. For example, the geographical spread of Mexico makes bus travel slow; hence, more people in the country are flying, which is an affordable and more efficient mode of transport and is driving long-term investment in airports.

Low volatility emerging market exposure

Although UEM's performance is measured against the MSCI Emerging Markets Index, the manager and his team are benchmark agnostic. For example, the index has c 22% in financials and UEM has a zero weighting, while UEM has c 23% invested in Brazil versus a c 5% index weighting. The trust’s sector and geographic exposures are an outcome of bottom-up investing.

While Jillings is encouraged by UEM’s strong relative performance versus the reference index, he believes that portfolio company valuations do not fully reflect their positive fundamental attributes. The manager therefore considers that the trust’s prospects look particularly appealing.

UEM offers a defensive exposure to emerging markets. At the end of FY23, the company’s five-year beta versus the MSCI Emerging Market Index (£ adjusted) was 0.83x. In Exhibit 1, we show the trust’s upside/downside capture over the last decade. In months where emerging market stocks rose, on average, UEM captured 77% of the upside, whereas in months where emerging markets fell, the trust captured just 60% of the downside. In recent years, UEM’s upside capture has remained pretty stable, while its downside capture has been more volatile, in line with the higher volatility in the broader stock market.

The trust’s defensive nature is not surprising given the type of investments in the portfolio – quality businesses with predictable revenue streams and strong cash flow generation. Several portfolio companies have inflation adjustments in their contracts, so can pass on higher prices. Jillings notes that over the last year some investee businesses have enjoyed both unit and pricing growth, leading to strong top-line growth, which he finds very exciting.

Exhibit 1: UEM’s upside/downside capture over the last decade

Source: Refinitiv, Edison Investment Research. Note: Cumulative upside (downside) capture calculated as the geometric average NAV total return of the fund during months with positive (negative) benchmark total returns, divided by the geometric average benchmark total return during these months. A 100% upside (downside) indicates that the fund’s total return was in line with the benchmark’s during months with positive (negative) returns.

Portfolio breakdown

UEM’s portfolio resilience is achieved via sector and geographic diversification, although if macroeconomic and political risks in a country are too high, investment there is unlikely. Within the investment team, there is competition to get companies into the fund, which is healthy and means the rationale for existing and potential new investments is challenged on an ongoing basis. Jillings comments that there are always many opportunities in UEM’s investible universe.

Exhibit 2: Portfolio geographic and industry exposure (% unless stated)

Geography

Portfolio end-August 2023

Portfolio end-August 2022

Change (pp)

Industry

Portfolio end-August 2023

Portfolio end-August 2022

Change (pp)

Brazil

23.3

22.0

1.3

Electricity

19.8

19.1

0.7

China incl. Hong Kong

13.5

15.4

(1.9)

Ports & logistics

18.9

18.1

0.8

Other Europe

10.7

12.4

(1.7)

Data serv & digital infra

12.5

14.9

(2.4)

Other Latin America

10.5

9.4

N/A

Renewables

12.5

9.4

3.1

India

10.4

12.8

(2.4)

Gas

7.0

7.7

(0.7)

Vietnam

8.1

7.9

0.2

Water & waste

6.7

5.1

1.6

UK

6.7

N/S

N/A

Airports

5.5

5.9

(0.4)

Other Asia

6.4

10.9

(4.5)

Telecoms

5.4

7.0

(1.6)

Middle East/Africa

5.8

5.0

0.8

Road & rail

4.2

3.1

1.1

The Philippines

4.6

4.2

0.4

Other

7.5

9.7

(2.2)

100.0

100.0

 

100.0

100.0

Source: UEM, Edison Investment Research. Note: N/S, not stated separately.

Brazil currently makes up around a quarter of the fund and has the largest year-on-year increase in exposure (+1.3pp). While the country already has favourable attributes, further state investment is required, and the Brazilian government is ambitious in this regard. The supply of renewable energy is increasing, but much of this additional capacity is being installed in northern Brazil, while most of its population live in the south. Hence, there is increased demand for transmission assets. Portfolio company Alupar Investimento owns a network of transmission lines. It has a highly regarded management team that consistently meets or beats expectations. When power lines are auctioned, Alupar only bids on selected projects, with clear hurdle rates for project returns and is unafraid to lose out in overbid auctions to protect shareholder returns. The company tends to deliver these ahead of time and under budget, thereby exceeding its initial internal rate of return estimates.

China makes up c 14% of the fund. UEM’s top 30 Chinese holdings include Kunlun Energy Company (gas transmission) and China Datang Corporation Renewable Power Company (renewable energy). This country is currently taking up a significant amount of the team’s time as its economy has not bounced back after COVID-19 as quickly as originally anticipated. However, Jillings’ view is that the Chinese government continues to focus on quality rather than quantity growth with investment opportunities still available within the data centres and gas transmission sectors. The manager suggests that for China, one needs to understand the government’s five- and 10-year strategies and invest alongside these.

UEM’s top 10 holdings

At end August 2023, UEM’s top 10 positions made up 35.3% of the portfolio, which was a higher concentration than 31.2% 12 months earlier. Following a revaluation in March 2023, unlisted Petalite has become the trust’s largest position. This took UEM’s total unlisted exposure over the 10% limit, which means no more unlisted investments can be made until the percentage is reduced, although this does not require forced sales of the trust’s private holdings. Unlisted investments remain close to the 10% limit and there are a couple of ongoing transactions, which could occur in the coming months to reduce UEM’s unlisted exposure; the manager’s preference is for listed businesses.

Exhibit 3: Top 10 holdings (at 31 August 2023)

Company

Country

Sector

Mega trend

Portfolio weight %

31 Aug 2023

31 Aug 2022*

Petalite**

UK

Technology

Energy transition

5.5

3.3

International Container Terminal Services

Philippines

Ports operator & shipping services

Global trade

4.6

4.2

Alupar Investimento

Brazil

Electricity generation & transmission

Energy transition

4.3

4.1

Orizon Valorização de Resíduos

Brazil

Waste treatment

Social infra

3.6

N/A

Gujarat State Petronet

India

Gas transmission

Energy transition

3.3

3.1

FPT Corporation

Vietnam

Data services

Digital infra

3.3

2.6

India Grid Trust

India

Electricity transmission

Energy transition

2.9

3.2

Engie Energia Chile

Chile

Electricity generation & transmission

Energy transition

2.7

N/A

Power Grid Corporation of India

India

Electricity transmission

Energy transition

2.6

2.6

Rumo

Brazil

Rail-based logistics operator

Global trade

2.5

N/A

Top 10 (% of portfolio)

35.3

31.2

Source: UEM, Edison Investment Research. Note: *N/A where not in end-August 2022 top 30. **Unlisted investment.

Examples of portfolio companies in each of the four megatrends

Energy transition – Power Grid Corporation of India has a transmission network of more than 170,000km. For India to meet its renewables targets, huge investment is required in its transmission assets ($50bn by 2030 according to the manager). Power Grid wins around 50% of the tenders it enters; it has a c $7.5bn pipeline of new projects, investing c $1.0bn a year. Jillings reports that the company is a successful operator, and its regulatory regime provides for a 15.5% return on equity. Power Grid has increased its payout ratio from 50% to 65% and its dividend has compounded at an annual rate of 18% over the last five years. The company is trading on a P/E multiple of c 11x and offers a c 6% dividend yield. Jillings says this is a ‘great business with a huge amount of growth still to come’.

Digital infra – FPT Corporation offers IT services to global multinational and local clients. It owns one of the largest fibre broadband networks in Vietnam and is a leading data centre provider. FPT also owns the largest private education company in Vietnam with more than 100,000 students. The country has a skilled and educated workforce, which can compete worldwide. Founded in 1988, FPT has an entrepreneurial culture and has delivered on its 20% annual earnings growth rate. Jillings highlights the company as being ‘a very exciting investment’.

Global trade – International Container Terminal Services (ICTS) is a Philippines company with 33 container ports in 20 countries operating long-term concessions. High operating leverage means the company is benefiting from increased volumes; over the last five years, volumes have increased by 25% but EBITDA has increased by 86%. ICTS has a strong management team, which is expanding the company’s margins. Jillings highlights the company’s attractive valuation and suggests the firm has very strong long-term growth prospects.

Social infra – Orizon Valorização de Resíduos is a Brazilian waste company that listed in February 2021 (UEM participated in the IPO) and owns several landfill companies. In Brazil, the waste industry is very fragmented, and many municipalities dump waste in unlicensed sites, which damages the environment. There is now legislation to shut this practise down and municipalities must use regulated sites, which benefits Orizon. Jillings reports that this company has the capital, expertise and knowledge to run its facilities successfully. Orizon’s EBITDA grew by 66% in 2022, helped by acquisitions. However, the company still only has a c 10% market share and, over the next five years, could double the amount of waste that it processes.

The emerging market backdrop

As shown in Exhibit 4 (left-hand side), over the last five years, emerging market stocks have considerably lagged the world market, which has been supported by the strong performance of US and technology stocks for most of the period. However, emerging economies have much better growth prospects than developed regions (Exhibit 4, right-hand side). Of note is India, whose population is estimated to have surpassed that of mainland China. In its World Economic Outlook, July 2023 update, the IMF projects Indian GDP growth of 6.1% in 2023 and 6.3% in 2024.

Exhibit 4: Market performance and growth outlook

Indices’ total return performance (£-adjusted, past five years)

GDP growth (IMF World Economic Outlook – July 2023)

Source: Refinitiv, IMF, Edison Investment Research. Note: e is estimate, p is projection.

Exhibit 5 (left-hand side) illustrates how attractively valued emerging market equities are in both absolute and relative terms. The Datastream Emerging Market Index is trading on a 10.8x forward P/E multiple, which is a 15.9% discount to its 12.8x five-year average. It is also trading at a 30.1% discount to the Datastream World Index, which is considerably wider than the 20.7% average discount over the last five years. At the end of August 2023, the MSCI Emerging Markets, MSCI Emerging Markets Utilities and MSCI Emerging Markets Infrastructure indices were all trading at lower forward P/E and price-to-book multiples, while offering a higher dividend yield compared with the MSCI World Index (Exhibit 5, right-hand side).

Exhibit 5: Index valuations

Datastream EM Index valuation (last five years, at 12 September 2023)

Indices valuation metrics at 31 August 2023

Source: Refinitiv, MSCI, Edison Investment Research

Performance: Building on positive relative record

Exhibit 6 shows the constituent members of the AIC Global Emerging Markets sector excluding a small, recently launched fund. UEM is a mid-sized fund and although its unique strategy precludes a direct comparison with its peers, a broad overview does provide some perspective. The trust’s NAV total returns are above average over all periods shown, ranking third and fourth out of 10 funds over one and three years respectively, while ranking fourth out of nine funds over the last five and 10 years. UEM’s returns do not take the dilutive effect of its historical subscription shares before February 2018 into account.

Unfortunately, the sector’s average valuation is distorted by JPMorgan Emerging Europe, Middle East & Africa Securities, which changed its name and mandate from investing in Russian securities. If this fund is excluded, UEM’s discount is wider than the average 10.4% discount. Its ongoing charge is above the mean and is a reflection of the specialist nature of the trust. UEM’s gearing is below average (half of the group is ungeared). The trust has an attractive dividend yield, which is 1.2pp above the sector mean.

Exhibit 6: AIC Global Emerging Markets sector at 12 September 2023*

% unless stated

Market cap (£m)

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount (cum-fair)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield (%)

Utilico Emerging Markets

436.2

4.5

34.7

33.7

88.4

(15.4)

1.4

No

102

3.9

Barings Emerging EMEA Opps

58.2

(4.9)

(9.3)

(3.1)

3.4

(20.0)

1.6

No

100

3.4

BlackRock Frontiers

267.9

7.8

69.6

47.0

110.3

(8.8)

1.4

Yes

118

4.0

Fidelity Emerging Markets

535.8

(3.5)

(19.9)

(0.4)

28.4

(14.2)

0.6

No

100

2.7

Gulf Investment Fund

78.2

3.5

89.2

134.9

233.1

0.3

1.7

No

100

3.0

JPMorgan Em Europe, ME & Africa

54.7

(24.5)

(94.3)

(92.4)

(91.4)

186.0

1.2

No

126

0.0

JPMorgan Emerging Markets

1,221.2

(5.1)

(0.8)

31.0

103.7

(7.9)

0.8

No

102

1.3

JPMorgan Global Em Markets

377.7

2.2

19.2

34.2

76.2

(10.3)

0.9

No

109

4.2

Mobius Investment Trust

158.1

10.1

36.3

(3.5)

1.5

No

100

0.9

Templeton Emerging Mkts Inv Trust

1,686.2

3.3

(1.3)

24.6

69.7

(14.3)

1.0

No

100

3.4

Simple average

487.4

(0.7)

12.3

23.3

69.1

9.2

1.2

106

2.7

UEM rank (out of 10 funds)

4

3

4

4

4

9

4

4

3

Source: Morningstar, Edison Investment Research. Note: *Performance data at 12 September 2023 based on ex-par NAV. TR is total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Given the unique nature of UEM’s investment proposition, the trust does not have a formal benchmark. However, to provide context the company publishes its performance versus the MSCI Emerging Markets Index. In FY23 (ending 31 March), UEM’s NAV and share price returns of +2.1% and +0.8% respectively were ahead of the index’s -5.0% total return. The trust’s long-term outperformance versus the MSCI Emerging Markets Index is shown in Exhibit 7.

Exhibit 7: NAV total return performance versus MSCI Emerging Markets Index over 10 years

Source: Refinitiv, Edison Investment Research

Exhibit 8: Investment trust performance to 31 August 2023

Price, NAV and benchmark total return performance, one-year rebased

Price, NAV and benchmark total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised.

As shown in Exhibits 8 and 9, UEM has had a strong period of relative performance over the last six months, which has enhanced its longer-term record. It is ahead of the MSCI Emerging Markets Index over the last one, three, five and 10 years in both NAV and share price terms.

Exhibit 9: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to MSCI Emerging Markets

1.3

1.0

8.2

12.0

37.1

19.0

9.2

NAV relative to MSCI Emerging Markets

0.7

(0.7)

8.0

11.3

32.5

19.3

9.6

Price relative to MSCI EM Utilities

2.8

3.6

7.6

35.4

17.2

23.2

42.1

NAV relative to MSCI EM Utilities

2.1

1.8

7.4

34.7

13.3

23.6

42.6

Price relative to CBOE UK All Cos

(0.8)

1.4

11.4

(0.9)

3.0

10.3

8.8

NAV relative to CBOE UK All Cos

(1.5)

(0.3)

11.2

(1.4)

(0.5)

10.6

9.1

Source: Refinitiv, Edison Investment Research. Note: Data to end August 2023. Geometric calculation.

Perhaps of more relevance is UEM’s performance versus the MSCI Emerging Utilities Index, on the understanding that utilities make up around a third of the trust’s portfolio. Again, it has outperformed over the last one, three, five and 10 years, but by a considerably greater extent than versus the broader MSCI Emerging Markets Index over the last one and 10 years.

Exhibit 10: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

MSCI Emerging
Markets (%)

MSCI EM Utilities
(%)

CBOE UK All Companies (%)

31/08/19

17.6

21.0

2.5

14.2

0.3

31/08/20

(21.0)

(20.3)

4.5

(22.6)

(13.5)

31/08/21

29.5

23.4

18.2

25.9

27.1

31/08/22

3.8

5.8

(7.1)

23.3

1.8

31/08/23

4.6

4.0

(6.6)

(22.8)

5.5

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Dividends: Fully covered since FY16 and growing

Since launch in July 2005, UEM’s annual dividend has been increased or maintained every year. Quarterly payments are made in September, December, March and June. In FY23, the trust’s 9.40p revenue earnings per share was 13.1% higher year-on-year, while the annual dividend of 8.45p per share was a 5.6% increase versus 8.00p in FY22. Over the last five years the annual dividend has compounded at an annual rate of 3.8%. At the end of FY23, UEM had 4.74p per share in revenue reserves, which is equivalent to c 0.6x the last annual dividend. Around 80% of UEM’s investee companies pay dividends.

Exhibit 11: UEM’s dividend and revenue history since FY13

Source: UEM, Edison Investment Research

Valuation: Board still aspires to a sub-10% discount

Exhibit 12: Discount over three years (%)

Exhibit 13: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 12: Discount over three years (%)

Source: Refinitiv, Edison Investment Research

Exhibit 13: Buybacks and issuance

Source: Morningstar, Edison Investment Research

In an environment of elevated investor risk aversion due to an uncertain macroeconomic backdrop, UEM’s discount remains stubbornly above the board’s sub-10% desired level. The latest 14.8% share price discount to cum-income NAV compares with average discounts of 14.2%, 13.2%, 12.9% and 11.3% over the last one, three, five and 10 years respectively.

The board typically repurchases UEM’s shares when the discount has widened to more than 10% in normal market conditions. In FY23, c 12.5m shares (c 5.8% of the share base) were bought back at a cost of c £27.2m.

Fund profile: An emerging market equity specialist

Launched in July 2005, UEM was historically a Bermudan investment company, but redomiciled to the UK as an investment trust via a scheme of arrangement on 3 April 2018. It is listed on the Main Market of the London Stock Exchange and is managed by the ICM Group (ICM and ICM Investment Management), a specialist fund manager based in Bermuda and the UK with c $24.0bn of assets under management (c $1.8bn directly and c $22.5bn indirectly). ICM Group has more than 80 employees, who operate from nine offices around the globe.

UEM is managed by qualified chartered accountant Charles Jillings, who has more than 30 years’ experience in global financial markets. He 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. Jillings employs a bottom-up stock-selection process and is unconstrained by benchmark allocations, although the MSCI Emerging Markets Index is used as a reference.

To mitigate risk, there is a series of internal investment guidelines in place (as a maximum percentage of gross assets at the time of investment): individual investment 10%; single country 35%; individual sector 25%; unquoted investments 10%; and top 10 holdings 60%. Gearing of up to 25% of gross assets is permitted. The trust’s currency exposure is unhedged. From launch to end August 2023, UEM’s NAV total return has compounded at an annual rate of 9.3%.

Investment process: Diligent bottom-up stock selection

Jillings and his team seek to identify and invest in companies, predominantly in the infrastructure and utility sectors, 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% pa, at an investee company level, over a five-year horizon. The focus is on emerging market countries with positive attributes such as political stability, economic development, an acceptable legal framework and an encouraging attitude to foreign investment.

UEM’s investment team has a long-term investment horizon and avoids short-term stock market ‘noise’. It can draw on the expertise of professionals in ICM’s regional offices and has direct relationships with companies. There is a lot of travel involved, meeting with company managements and their operating assets. ICM is often the first phone call when an infra/utility IPO is announced and its investment specialists are used as sounding boards ahead of companies listing. UEM’s investment team is supportive of its investee firms in terms of their capital requirements by participating in follow-on equity offerings and the trust is often among their largest international shareholders.

Stocks are selected on a bottom-up basis following thorough fundamental research (including the construction of a detailed financial model and valuation targets) from an investible universe of more than 1,000 companies. There are c 80 holdings in the portfolio (typical range of 60–90). UEM has an active share approaching 100% versus the MSCI Emerging Markets Index; this is a measure of how a fund differs from an index, with 0% representing full replication and 100% no commonality.

Because of the nature of UEM’s investments, in companies providing essential services, the trust has tended to underperform the MSCI Emerging Markets Index during a cyclical upturn led by sectors such as technology and consumer discretionary, while outperforming in a falling market.

UEM’s approach to ESG

While UEM is not an ESG fund, its board believes it is in shareholders’ best interests to consider environmental, social and governance factors when selecting and retaining investments. In conjunction with assessing the financial, macroeconomic and political drivers when making and monitoring an investment, the manager embeds ESG opportunities and risks into the trust’s investment process. Companies are scanned using a rigorous in-depth framework; however, the decision as to whether to make an investment is not made on ESG grounds alone. The manager can consider a potential investment with a low ESG score but this will need to be outweighed by an attractive total return potential. Every investee company’s ESG footprint is analysed, and there is often still room for improvement at some of these businesses. The manager works to understand a company’s ESG journey and seeks an improving score.

Factors are incorporated into the trust’s investment process in three main ways:

Understanding: in-depth analysis of the key issues that face potential and current holdings, as well as a deep understanding of the industry in which they operate.

Integration: incorporation of the output of the ‘understanding’ into the full financial analysis to ensure a clear and complete picture of the investment opportunity is obtained.

Engagement: communication with investee companies on the key issues on a regular basis, both virtually and on location, where possible, to discuss and identify any gaps in their ESG policy to further develop and improve their disclosure and implementation.

ICM is a signatory to the United Nations-supported Principles for Responsible Investment, a code of best practice for incorporating ESG issues.

Gearing

UEM has a three-year unsecured £50m multicurrency revolving credit facility with The Bank of Nova Scotia (London branch) that expires on 15 March 2024. Looking at the last 10 financial year ends, the trust’s leverage ranged from a 1.4% net cash position to net gearing of 10.6%. At end August 2023, UEM had net gearing of 1.2%.

Fees and charges

ICM is paid a management fee of 1.00% of UEM’s NAV up to £500m; 0.90% above £500m up to £750m; 0.85% above £750m up to £1bn; and 0.75% above £1bn. There is no performance fee following its removal in April 2021. UEM’s board believes that the simpler and more transparent cost structure should contribute to a stable and competitive ongoing charge, while helping to attract private wealth managers and retail investors. A tiered fee structure allows shareholders to benefit from the increasing economies of scale that a larger portfolio provides. In FY23, UEM’s ongoing charge ratio was 1.4%, which is unchanged year-on-year.

Capital structure

UEM has 198.3m ordinary shares in issue and its average daily trading volume over the last 12 months was c 325k shares. The trust has a five-yearly continuation vote, with the next due at the September 2026 AGM. The September 2021 vote was passed with 84.2% of shareholders voting in favour of UEM’s continuation.

Exhibit 14: Major shareholders

Exhibit 15: Average daily volume

Source: Bloomberg. Note: At 31 August 2023

Source: Refinitiv. Note: 12 months to 12 September 2023.

Exhibit 14: Major shareholders

Source: Bloomberg. Note: At 31 August 2023

Exhibit 15: Average daily volume

Source: Refinitiv. Note: 12 months to 12 September 2023.

The board

Exhibit 16: UEM’s board of directors

Board member

Date of appointment

Entitlement in FY24

Shareholding at 31 August 2023

John Rennocks (chairman since 2016)

November 2015

£52,500

211,464*

Susan Hansen

September 2013

£38,900

166,429

Eric Stobart

October 2019

£49,100

63,250**

Mark Bridgeman

September 2021

£38,900

17,887

Isabel Liu

November 2021

£38,900

26,079

Source: UEM. Note: *Includes 5,882 shares held by Mrs Rennocks. **Includes 5,500 shares held by Mrs Stobart.

The directors’ fees are used to acquire UEM shares, ensuring all shareholders’ interests are aligned. Fees for the financial year ending 31 March 2024 were increased by 5% year-on-year.

Susan Hansen is considered non-independent as she is also on the board of Resimac Group, which is associated with ICM. She has indicated her intention to retire from the board following the conclusion of UEM’s next AGM in September 2023. The company intends to maintain the board with the remaining four directors, all of whom are independent.

General disclaimer and copyright

This report has been commissioned by Utilico Emerging Markets Trust and prepared and issued by Edison, in consideration of a fee payable by Utilico Emerging Markets Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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General disclaimer and copyright

This report has been commissioned by Utilico Emerging Markets Trust and prepared and issued by Edison, in consideration of a fee payable by Utilico Emerging Markets Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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