Fund Spotlight: a different way to play fast-growing economies

Those looking to invest in the defining themes of tomorrow’s world have recently found themselves focused heavily on artificial intelligence-related companies in the US. While this has only added to the perception of US equity market exceptionalism in recent years, investors should remember that such mega-trends are far from confined to US technology companies.

In fact, many integral and transformative companies can be found across fast-growing emerging regions and often across less-celebrated sectors. Recognising a wider and more global set of opportunities feels ever more pertinent as volatility emanates from the US in lieu of a mounting expensive debt position, a weakening dollar and fears that protectionism could induce a global recession.

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While infrastructure and utilities businesses, being better known for their lesser volatility and resilient revenue streams, recently have attracted investors’ attention less than sectors such as technology, some of these less economically sensitive companies both benefit from and provide the underpinnings of the structural drivers of emerging regions’ growth. These drivers include positive demographic trends and growing youth populations, increased consumption driven by rising affluence, as well as higher rates of domestic economic growth than many developed regions.

Utilico Emerging Markets Ord (LSE:UEM) invests predominantly in infrastructure and utilities assets across emerging regions with a focus on cash-generative companies with economically resilient revenue streams. In pursuing strong long-term total returns, the trust aims to tap into companies and assets that form the basis for the mega-trends that drive emerging economy growth. These include the rising middle-classes and growing urbanisation; decarbonisation and investment in energy; increased demand for digital infrastructure; and shifting global trade and supply chains.

It is a highly active and much differentiated emerging market option providing a unique exposure, and while the investment trust is not specifically managed to an income target, it has been a consistent dividend payer currently offering an attractive level of income.

What does the fund invest in?

Managed by the hugely experienced Charles Jillings, alongside freshly promoted co-manager Jacqueline Broers, UEM invests predominantly across developing Asia, Latin America, Africa and Emerging Europe. While UEM is able, in theory, to invest in bonds and convertibles, in practice it focuses predominantly on listed utilities, transport infrastructure or communications companies.

The trust is not formally managed to any benchmark, although compares versus the MSCI Emerging Market index for performance purposes. The companies and underlying assets UEM invests in are characterised by sustainable and growing cash flows and accordingly, income has historically comprised a not insignificant portion of the trust’s returns.

Differentiation from peer emerging market strategies or a conventional emerging markets index is evident in both geographic and sector exposure. While Chinese and Indian stocks together are the dominant allocations across peers and form a combined half of the MSCI Emerging Markets index for reference, for UEM the largest geographic allocation is to Brazil (24%), followed by China (11.5%), with India comprising under 7% of the portfolio. Exposure to Latin America makes up around 40% of the equity exposure, and a similar degree of revenue exposure.

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Latin America is a long-held conviction for the trust and is reflective of the raft of quality asset opportunities the team find including Brazilian waste management leader (Orizon Valorizacao de Residuos), ports and logistics operators (Santos Brasil Participacoes) and Alupar, a renewable assets company operating across Brazil, Colombia and Peru. The team also highlighted their watching brief on Argentina as an ambitious economic reform is undertaken and conditions stabilise.

Utilities and industrials stocks form more than two-thirds of the portfolio, with a heavy allocation to companies providing/servicing electricity (18.1%), water/waste (16.7%), digital/data infrastructure (13.8%) and operating ports (10.5%). With stock selection being a large driver of portfolio construction, the portfolio is concentrated from a stock level, with the top 10 positions accounting for more than 38% of assets.

UEM historically has capitalised on the advantages of its closed-ended trust structure, being able to allocate to and provide funding for unlisted assets, although this capability is modestly used currently. The trust is also able to leverage to enhance returns, and gearing is currently at a conservative 3% level.

How has the fund performed?

Performance can be expected to differ notably from index returns but this has often been a positive, and despite the typically more defensive nature of the assets in which UEM invests, the trust has an impressive track record. While UEM has lagged in some periods of market strength (such as the strong first half of 2024 driven by Indian equities) returns throughout the first months of 2025 have been impressive. Even despite a lingering discount of just over -15%, the trust’s absolute and relative returns are strong, with five-year returns near to double that you would have received from an emerging markets index fund.

Income has formed a reasonable portion of these strong returns over time given that over 80% of portfolio companies pay dividends, and UEM has a strong record of growing its quarterly dividend, which has been paid entirely out of portfolio earnings, while a substantial revenue reserve is retained.

Source: Morningstar Market Returns (GBP). Past performance is not a guide to future performance.

Why do we recommend this investment trust?

UEM is a highly active and differentiated product, given its thematic focus on utilities and infrastructure businesses. It stands out for its specialist team, attractive income properties and markedly differentiated country exposures.

What has impressed over the long term is the team’s record of excess returns above a conventional benchmark through investment in sectors more typically considered to be defensive – utilities and infrastructure. It is testament to their thesis that these are sectors and companies set to benefit from being the facilitators and foundations of global mega-trends, such as societal transformation, digitisation, and the energy transition.

The current discount is -15.1%. Interestingly, it appears to have drawn some interest from activist investor Saba Capital. The trust’s yield stands at around 4% and a dividend is paid quarterly, with UEM having a strong record of growing this year-on-year.

The yearly ongoing charge of 1.5% is high, however UEM offers expert navigation of exposures that are seldom found elsewhere and has delivered excess returns above an emerging market benchmark after fees throughout its history.

This fund can be found on ii’s Super 60 list of investment ideas. The latest factsheet can be viewed here.