Fund spotlight: Utilico Emerging Markets investment trust

An interactive investor analyst offers a view on one of our Super 60 trust picks.

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Utilico Emerging Markets (LSE:UEM) investment trust, which despite being behind its MSCI Emerging Markets reference index in 2020, has great potential to benefit from the ongoing recovery in emerging markets, especially in those areas where economic activity is about to start normalising. In addition, the strong yield that the strategy offers, currently 4.1%, should have a more supportive role for total returns going forward. The trust has great potential to bounce back in 2021 and have a much better year.

The trust is run by Charles Jillings, who has more than 30 years’ experience, and aims to provide attractive long-term absolute returns by investing in companies in emerging markets, primarily operating in the areas of utilities, infrastructure and other related sub-sectors. What is appealing about such businesses is that they operate in a regulated environment and usually offer sustainable income. This is supportive for maintaining the trust’s high dividend yield, which although not a formal objective is one of the strategy’s strengths.

Shares are selected on the basis of their fundamentals, while attention is focused on the broader macro picture. The manager favours companies that are trading at a discount to their perceived fair value and that have the potential to return more than 15% over five years. That said, such firms tend to be businesses in emerging countries, where political stability, sustainable economic development and openness to foreign investment are some of the main priorities.

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What does it invest in?

The combination of individual stock-specific research from an investable universe of more than 900 candidates and macroeconomic analysis results in a portfolio of approximately 60 to 90 stocks with high concentration in the top 20 holdings, which represent more than half the entire assets. There are also strong internal risk controls in place, which makes it unlikely for a single holding to rise above a 10% weighting, while allocation to any single country is limited to 35%.

Currently, the trust’s portfolio is a healthy mix of companies spread across defensive and more sensitive areas of the market, with limited exposure to cyclicals. The top three sectors include electricity, ports and logistics, and data services and infrastructure. On a country level, the manager tends to find most investment opportunities in Brazil and China, each having an allocation of 19%, while India has 12%.

Recent new additions to the portfolio include a South Korean data centre operator, the Colombian stock exchange, a Malaysian e-government operator, and a Brazilian toll road operator. Being valuation-minded, it is unsurprising that the manager tends to buy considerably cheaper stocks than the market index.

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Performance

• Click here for more information on this fund, including price, yield and charges

Source: Morningstar

The ii view

This is a unique proposition and its competition is little to none. Its highly regarded manager has devised the strategy in such a way that it is appealing to both income and more growth-focused investors, while providing diversification benefits and downside protection. Its sustainability of dividend yield gives the trust a competitive edge. Although the formal mandate is not income-oriented, the board are committed to maintaining the current level of dividend payments for the financial year ending 31 March 2021. It should also be highlighted that environmental, social and governance (ESG) factors are incorporated into the trust’s process, which makes it a suitable option for the growing number of ESG-aware investors.

Considering the trust’s specifics, such as investing in emerging markets and its sector concentration, its strategy could fit the needs of investors with a higher-risk appetite, but due to its large exposure to more defensive areas, it is also suitable for those with more balanced approach. The trust is currently trading at around 13% discount to its net asset value (NAV), which could be an attractive entry point for contrarian and value investors.