Charles Jillings, manager of the Utilico Emerging Markets (LSE:UEM) investment trust, sits down with interactive investor’s Sam Benstead to discuss his approach to investing.
He breaks down the strong income and growth potential of emerging market stocks that provide critical infrastructure, transport and communications services.
Jillings talks about some of his favourite stocks, including a waste removal and recycling firm in Brazil and airport operators in Mexico.
Utilico Emerging Markets is a member of interactive investor’s Super 60 list of recommended funds.
Sam Benstead, deputy collectives editor, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Charles Jillings, manager of the Utilico Emerging Markets Trust. Charles, thank you for coming into the studio.
Charles Jillings, manager of the Utilico Emerging Markets Trust: Good afternoon.
Sam Benstead: You're investing in emerging markets and picking companies in the infrastructure, communications, and utilities spaces. These are types of companies which often pay investors back via dividends. And the trust yields about 4% at the moment. So, are you an income investment trust or you also focused on capital growth?
Charles Jillings: You're right that we generate income, but it's not our driver. It's an outcome. And you've got to be careful that some of the more mature industries like transmission are very often paying quite high yields, although they've got expansionary opportunities and certainly growth opportunities. But you know that certain industries pay slightly higher yields, certain regions pay higher yields. Latin America pays a higher yield than Asia. It's just an outcome. So [you've] always got to be careful about the income.
The outcome, though, of all our investing is that we've had a covered dividend all the way through Covid. So, despite all the sort of anxiety around corporates holding back and not paying, they paid, and our earnings have risen, and we've paid a rising dividend and it's covered. So that's a positive, but it's not something I manage for. I'm well aware a lot of our investors are acutely interested in income. And, so, it comes into our thinking and if we can find an opportunity where the growth and the income combined offer us an attractive return, we'll go for the higher income.
Sam Benstead: And do you think earning an income from the types of stocks that you buy is an overlooked area for many investors? This is a niche part of emerging markets, which is itself perhaps a little bit different to what most people buy. So why are you investing now? What gap are you plugging for many investors at home?
Charles Jillings: So, I think the gap we're plugging is investors want to be invested, for diversity in part, but also be exposed to growth. And I think the combination of growth, which comes from, say, an airport operator adding another terminal, which can very often push up, say, capacity from 30 to 40 to 50 million. That raw growth and that leverage that I was talking about in International Container Terminal Services (ICT) is a real attraction.
So, I think they understand the nature of infrastructure assets. I think they understand that we are able to build financial models and hold management teams to account. The one thing I would emphasise is that I've got a fabulous management team sitting underneath me. They've got all of them over ten years - I've got the number collectively. We've all travelled, so we've got deep experience about the various models. There are probably two comments I'd make. One; you have to know the regulatory framework. You also have to know what's the driver, what's causing enough change and confidence for us to be investors. So, you look at Orizon, the change is a law which requires all cities to now properly dispose their waste. So that's fabulous impetus.
The other thing I think you have to be very comfortable with is broadly the legal framework, broadly the outcomes. So, if you look at Russia, we've tended over the decades to shy away from it. Every time I look at it, it's cheap. Every time I look at it, it's too difficult. When we went into the Ukraine war, we had one investment: it was fairly small. Day one, we sold 60%. But I almost kept it as, keep me honest, it tells me about all the problems that exist in a number of countries.
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Sam Benstead: You said some areas are too cheap. Do you generally invest in expensive or better valued companies? And would you identify as a growth or a value investor, or somewhere in the middle?
Charles Jillings: Instinctively, we are about value because these companies are up and running. We tend to invest where we can see return over a three/four/five-year cycle, and we can see that the management team can outperform and deliver.
Sam Benstead: Two-year performance is very strong. Your trust is diverged from the Emerging Market Benchmark which you're tracked against. So why is that? Why has performance been so good recently?
Charles Jillings: Easy. Covid, I think, accelerated the digital economy and that was no different here or Brazil or Vietnam, etc. And the digital economy attracted in investors. And so, you saw a lot of excitement behind a lot of the consumer digital platforms. And those are just not businesses we're invested in. Our businesses continue to deliver, continue to perform. But the market was looking in the other direction. I think what's happened since Covid has abated, is the markets have de-rated their excitement around a lot of the tech stocks and ours continue to perform and continue to deliver.
Sam Benstead: So, being away from those technology shares is what helped you?
Charles Jillings: We'll stick with what we know. I'm not going to try and chase something that we don't know. And as long as we can see a good return - I'm looking for 10% plus - at the moment, we're down about 9.3%, although this month is going to be another good month. What I would say is I think as an investment team, our view is that our stocks are fundamentally undervalued at the moment.
Sam Benstead: Can you talk me through some recent investments that you've made? Which areas of the market are you particularly excited about?
Charles Jillings: We've obviously invested in Orizon. If you went back, I think even 12 months, it was about 20th in the portfolio, it's in the top 10 and likely to increase. So that's one. We've invested in airports. Going into Covid, we were somewhat lucky in that we didn't have much in airports. It was quick or easy to work out that they were going to be a real casualty in terms of shutdown. So, we sold out what we had pretty much. We've gone back in - I think we've got about 7.5%. If you look at Mexico, we’ve got three airport investments, two in the top 30. They're seeing above average growth rates as the economy comes back. So, what's driving those airports? Three things. One group up in the north is driven by nearshoring. So, activity is rising, and international tourism is rising. One's in the middle, which is really about the local consumer travel in Mexico: lots of mountains, long bus journeys, tough to undertake. The sort of journey time on a plane is cheaper and quicker, so you can see there is a real driver behind those volumes.
Sam Benstead: Your largest position is a private company, a UK-based private company called Petalite: it runs electric vehicle charging networks. So, why did you invest in this position? What is the opportunity there?
Charles Jillings: We've been looking around for things that are exposed to EV, and I think as a team we inherently feel uncomfortable going into the unlisted space, into places away from the UK. So, while we were looking, it wasn't something that we were actively processing. In Covid, the opportunity came along to invest in a UK company and, we thought, very attractive rates. It would give us that exposure to emerging technologies, which should end up being a utility-type application. We made the investment. It's exceeded our expectations. It is unlisted. It is pre-revenue. Management are confident, but we'll have to see.
Sam Benstead: And you own about 30% of the company, that's a large share. Does that come with extra risk attached? Does that make you even more excited about owning it?
Charles Jillings: Look at it this way around: when we went in, it was a relatively small size ticket for us and that we negotiated, 30% was an outcome of early stage investment - I think you have those. One thing I would emphasise is that we have elsewhere management teams that do look at these types of opportunities. We run another fund which buys unlisted shares, usually fintech, and we've been very successful at that. So, we can draw on them for insight and how to approach it. But it was opportunistic. I don't think you should read into it that we will repeat it.
Sam Benstead: Is there a cap on unlisted shares in the portfolio and are you anywhere near that cap?
Charles Jillings: There's a cap of 10% and we are technically over it today. We've got a number that's in rundown and the biggest one of which is a wind farm in China that we went into. It's now built out an agreed terms of sale and we are in the process of taking the money out of China. It'll take a bit of effort, but [while] it stays in the holding company, even though it's cash, we’ll treat it as an investment.
Sam Benstead: Has China generally been a country that you've avoided investing in, or is that an exciting opportunity?
Charles Jillings: I look at China and its real strength is central government. We can talk about it's a weakness on some levels, but the real strength [is] central government, central direction, a big population, big opportunity. So, we tend to try and look for things that we can understand that they want to achieve. So, things like gas distribution, where they wanted cities to gasify, and they incentivised corporates for signing up customers. So, you got the benefit of not only signing up the customer but also then serving them with gas. That's been a good investment for us over time. So, we look to understand what the drivers are and then invest alongside the outcomes.
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Sam Benstead: The trust is on a 13% discount. Is that normal for you? And could it be linked back to that private company allocation where investors are a bit sceptical about the value of the unlisted portion of the portfolio?
Charles Jillings: Frustratingly, we've had a wide discount. I think we're not any different to any other EM investment trust. I think in times of uncertainty, shareholders tend to withdraw to the sidelines, and you see these discounts widen out. If you looked at us historically, we've ranged from, 7% to 13%. So, it's a frustration. We want to see it narrowed. We have a very strong buyback policy. We approach it as an investment. If I like the portfolio and I can buy the shares on 13% discount, we buy them.
Sam Benstead: The trust costs about 1.5% in fees. It's relatively high compared to more vanilla equity investment trusts. So, what are investors getting for their money?
Charles Jillings: An absolutely world-class investment team with real knowledge about the Brazilian regulatory framework or the Chilean regulatory framework. Twenty years almost of experience - we started in 2015 and we're getting towards the 20 years. The sort of footprint that we've developed in terms of our relationships with regional brokers. We've got very strong understanding and reach into all these markets.
You're probably a slightly bigger team than, smaller companies, UK, which might be two or three - we are seven, eight, nine. I've got somebody who covers Brazil, Latin America, who lives in Brazil. We've got somebody who covers China because of the language and just making sure that such an important component of emerging markets, we understand. So, we've got a slightly bigger team, a lot more experience. And while the costs may run higher, the performance is coming through.
Sam Benstead: And finally, the question we ask all our guests, do you personally invest in the trust?
Charles Jillings: I do. I'm a shareholder and delighted to be a shareholder.
Sam Benstead: Charles, thanks very much for coming into the studio.
Charles Jillings: Thank you very much for having me.
Sam Benstead: And that's all we have time for today. You can check out more Insider Interviews on our YouTube channel where you can like, comment, and subscribe. See you next time.
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