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, which focuses on investing in infrastructure, utilities and communications, across emerging markets.
He breaks down why such companies make compelling investments, and explains why understanding local rules and regulations is key to what they offer investors in the investment trust.
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: Could you give me some background on what your investment trust does? Where do you invest and what do you invest in?
Charles Jillings: We are a London-based investment trust listed on the London Stock Exchange, and we invest in emerging markets. So that would be Latin America, Asia, Eastern Europe, a bit of Africa, maybe we can come on to why not more, and we're invested in predominantly listed companies that give us a degree of insight into how they govern themselves.
We're invested in operational entities for the main parts, so they're up and running, running an airport, a toll road, very often expanding. And that's the sort of real opportunity. And we're focused on infrastructure so ports, airports, toll roads, but not necessarily the users of it. So not airlines, not shipping lines. We like the underlying asset. We're investors in utilities, so power, water and gas. And we're investors in what I would loosely call communications, so mobile phones through to satellite masts. Data centres are a reasonable part of the portfolio.
Sam Benstead: So, communications, utilities, and infrastructure across emerging markets. Why is that an exciting area to invest in?
Charles Jillings: Two things. One is the growth markets, they fundamentally have growth in them, and sometimes I think you can get lost in GDP. If you looked at Brazil and you looked at, say, Orizon Valorização de Residuos, which is one of our investments, the Brazilian government passed legislation that basically said they wanted to achieve 90% waste collection, sewage collection. They're way behind. And so that's a real driver for that sector, and Orizon is a leading player in it. And therefore, your growth opportunities are quite high.
The other factor is just raw GDP. However you add it up, emerging markets are growing, and our assets tend to be GDP-linked. So, if you looked at power generation, it tends to be GDP plus. If you looked at containers, what happens for the container port is that the port sucks in more and more containers. Somebody shipping a quarter of the container, when they come to two, three, four, they go into the port and therefore the port growth rates tend to be stronger, and those are the aspects of that that make it exciting.
Sam Benstead: And what is the typical geographic split across your investment universe? Are you finding more opportunities in Latin America or Asia or Africa at the moment?
Charles Jillings: The simple way to answer is that we're bottom-up investors, so it's an outcome. Obviously, I sit across the top. I've got three senior analysts, two of whom are portfolio managers alongside me. They look after utilities, infrastructure and communications. To generate the opportunity, they will put forward ideas and we discuss them, and we make a reasonably collective decision. Ultimately, I make the final decision. So, it's an outcome, but we pay attention. So, we're not going to end up all in airports and we're certainly not going to end up all in one country. If you look at us over time, plus/minus the boundaries are about 20-24% in any particular industry, and about 20%, 24%, 25% in any country. That said and done, Brazil's been up historically over 30%. But we do try and pick the opportunity that gives us diversity.
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Sam Benstead: In emerging markets, the shares are often quite volatile. You also have lots of currency risk. But you're investing in these more stable, predictable parts of the investment universe in a volatile area. So, how would you categorise the fund? Is it lower risk or higher risk?
Charles Jillings: So, it’s a number which people talk about. If you look at the beta of the fund it's under 0.9, so that would tell you there's a reasonable stability in what we're investing in. If you look at the outperformance for achieving, it's because we are clearly selecting the right investments, which is giving us that alpha. It is volatile, but I think…it's an opportunity if you want, because we will remain fully invested, and that's one commitment I make to all shareholders. We're not going into cash. That's not our job. Our job is to find investments. If a shareholder wants to go into cash, they can sell in the market.
Having said that, [it’s] a challenge to get into the portfolio because we’ve got to sell something out of it, and its relative opportunity at the time that we add investments. And what I would say is, we usually say we'll sell this at X, and we'll buy that. It may take us two weeks, it may take us longer, but we'll stick with the levels we've set unless there's a reason that needs to be changed. But over time, they get filled. And it surprises me that, if you're patient, you can pick up some really good starting positions.
Sam Benstead: Can you talk me through the investment case for some of your top positions?
Charles Jillings: If you looked at something like International Container Terminal Services (ICT), which is an international container operator based in the Philippines. Fabulous management team. [That’s] the one thing I would say about all our investments, absolutely fabulous management teams. Two things really matter, management and governance. If those are strong, then they can out the opportunity and we won't be surprised along the way.
ICT has been in the portfolio since the beginning and if you look at them, they're classic. A year to December, I think their container growth was 7%. Their, if you want, revenue growth was 14%, their EBITDA was 23%, and their earnings per share were 44%. It's a leveraged outcome, and that's really exciting. They're a very disciplined management team. They understand both the opportunity but also the risk.
Sam Benstead: Are there any other examples of companies we can talk about?
Charles Jillings: Orizon, which I mentioned earlier. Orizon is an operator of 15 waste sites in Brazil, and I've just been out to Brazil to see one. When you see them on the ground, you get a sense of both scale but [also] opportunity. Since this law has been passed, they've assembled a fabulous portfolio of assets and they get the majority of revenues from waste collection and putting it into waste sites, but they're adding incrementally biogas, they're adding incrementally the sorting, and they're even in a position to sell the carbon credits into the European market.
So, if I look at the revenue streams that are coming from improving their operational activity, and if I look at the assets that they have and the assets they can buy, there is significant upside here. Fabulous management team.
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Sam Benstead: You said there that you travel around a lot. You went to Brazil recently. So how important is it to go out to the companies that you invest in, and what do you find that you're learning at the moment?
Charles Jillings: So, it's essential to travel. I think you can read a lot. And once you've got an investment in [something], you've got a relationship, you can certainly maintain it. But what you can't do is understand how the environment is changing around them, understand, if you want, how the local population is looking at that and using the opportunity. So, we travelled to Latin America in February/March, we travelled to Asia in about November, and we go to Eastern Europe in June/July. It’s concerted effort, all the teams go, we break up, we try and cover all the companies, and then you build on that knowledge base. So, this time [we’ve] just been to Mexico, Chile and Brazil. And to give you an insight, in Mexico, we went to Monterrey City. I was really interested in trying to understand nearshoring. Is it a topic? Is it real outcome on the ground?
Sam Benstead: Can you define nearshoring for us, please?
Charles Jillings: Tension between the US and China is causing a lot of corporates - and Covid for that matter - to shorten their supply lines, look for alternatives, reinforce them. And while China used to be the biggest exporter to the US, Mexico is now the biggest. And what's happening is US corporates are supplanting business into Mexico. Interestingly, they're not taking it out of China. China remains a massive opportunity, but they are putting it in there to service the US market much more efficiently.
And so, we went and saw some warehouse operators, and usually when you see a warehouse operator, you ask about vacancies, how efficient are they, are they running at 90%/95% occupancy? They were all running at 100%. And it was extraordinary to see the sheer demand because people are looking to place production in Mexico. And I don't think [without visiting] I would have walked away with a sense of energy and drive.
You would also probably have missed the one challenge of the headwind, and the headwind is energy in Mexico. Mexico is short energy if it is going to properly exploit this opportunity. So, a lot of the discussion was around how are you going to solve that? In the short term, it might be a challenge, but long term, hopefully, they will and Mexico will properly benefit from it.
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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