Buy Utilico's strong returns and income at a good price

Broker Killik highlights the fund as looking attractive on a discount basis.

"The NAV returns have proved relatively resilient in the face of weakness in broader emerging markets equities," says Mick Gilligan, head of research at Killik & Co. "The NAV has outperformed the MSCI Emerging Markets TR Index in each of the last three calendar years and year-to-date. The broad weakness in emerging markets equities has pushed the shares out to a 7.6 per cent discount, despite this resilient performance."

The investment trust reported in its most recent annual report to the end of March that it has made a positive NAV return in seven out of eight years since its launch in 2005 and the average annual compound total return per share was 14.2 per cent.

The trust aims for a long-term total return by investing in infrastructure, utility and related sectors, mainly in emerging markets. It tries to reduce risk by investing in companies and sectors of essential services or monopolies such as utilities, transportation infrastructure, communications, and companies with a unique product or market position.

We tipped the trust in 2010 because it offers the potential for emerging markets growth and strong long-term dividend growth, together with the defensive attributes of infrastructure and utilities (read the tip).

However, the trust has a very high ongoing charge of 3.31 per cent due to a performance fee of 15 per cent of any outperformance of adjusted equity funds attributable to shareholders in excess of a benchmark index. The benchmark index is the post-tax yield on the FTSE Actuaries Government Securities UK Gilt 5 to 10 years index, plus inflation, plus 2 per cent. No performance fee is paid if the adjusted equity funds are less than the previous year.

The trust's manager, Charles Jillings, says the performance fee is not paid every year, Utilico Emerging Markets has a low 0.5 per cent management fee and it keeps a tight control on other costs. The performance fee has been levied in five years out of nine since launch.

Because it is domiciled offshore, Utilico is able to distribute both capital and income returns as dividends and its final quarterly dividend of 1.525p was paid from its capital reserves. While this is attractive for income investors, those seeking growth might prefer funds and trusts focused on this.

But Utilico Emerging Markets has performed very strongly and invests in unusual assets that private investors probably couldn't access otherwise, while mitigating downside risk despite its emerging markets focus. So if you are interested in emerging markets growth with some added income, it remains worthy of consideration. Buy.

Source: Morningstar & *AIC

Source: Morningstar as at 5 August 2013

TOP TEN HOLDINGS as at June 2013

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