Utilico Emerging Markets stays ahead of the index

"Our companies have delivered good results," he says. "So we will be doing more of the same and have not felt there is a need to make a fundamental change to continue to achieve what we have for the last eight years."

The trust targets operational assets so that they are strongly cash-generative, some of which are expanding significantly. He says an example of this is the trust's largest holding, Malaysia Airports (MK: MAHB), of which passenger numbers are growing.

Some of the assets they invest in are in cities of which the gross domestic product (GDP) is growing faster than their overall countries, an example being Shanghai. "Our holdings are GDP plus businesses," says Mr Jillings.

The trust's investment team seeks what he describes as anomalies among the areas they invest in. They also seek companies with a low enterprise value (EV)/EBITDA, a good growth rate and cash flow, and preferably which pay a dividend - though he admits that not every investment offers all of these. "We also favour experienced management teams which can execute the necessary strategy," he adds.

An example of an anomaly is the trust's seventh largest holding, Asia Satellite Telecommunications (HK: 1135), which was very undervalued when bought. "This had two large shareholders and a limited free float, and the market did not understand the growth opportunities in satellite companies," he says. "But it has good cash flow and a low EV/EBITDA."

While they like a company which pays a dividend and the trust has an attractive yield of 3.34 per cent, they aim for total return so want good growth dynamics. Mr Jillings says income is a key consideration but not a driver, and is confident that the current level of dividend can be maintained.

They are long-term investors, so if they find good investments they keep them and let them increase, and as a result the top 10 holdings account for more than half of assets. "We do not turnover an investment unless we find a good idea, because if we buy a new one we have to sell one of our existing ones."

Risk mitigation

The trust avoids riskier, less developed frontier markets, where there are also fewer listed companies in the areas it invests in.

To minimise risk, the team trims back any investment which grows to more than 10 per cent of assets.

The investment team also sells a stock if it is fully valued or has been disappointing, and looks to reinvest.

Individual countries generally don't account for more than 30 per cent of assets and outside the top 10 holdings there is a wide spread. Although having such a concentrated top 10 holdings theoretically is riskier, Mr Jillings argues that "the companies in the top 10 holdings got there because of their performance and are delivering results, and we are comfortable with them."

The investment team visits most of the portfolio holdings, which includes going to see the site of the asset. "For example, if we are visiting a port, we will look at things such as what road and rail links it has and how deep it is," he explains. "We look at things such as monthly statistics or passenger numbers, and how they contain costs."

They avoid greenfield sites and projects which need planning permission or co-operation with a wider group. Mr Jillings doesn't like construction companies which own infrastructure because there can be a conflict of interest as well as operational risk. "We also avoid conglomerates because there are too many moving parts," he adds. "We prefer companies which operate one type of asset."

While Mr Jillings describes them as "bottom up" stock-pickers - choosing companies according to their individual merits rather than by sector or geography - they have to consider certain wider factors. "We are top down in the things we wouldn't do," he says. "For example, we wouldn't invest in Argentina, Venezuela or Libya, and don't have much in Russia, because of concerns over ownership of assets, political risk and poor corporate governance.

We also look for environments where there is a positive growth dynamic."

They prefer a well developed operating and legal environment, a positive attitude towards foreign investment, and countries with a growing middle class which requires better infrastructure and utilities.

The trust has been hit by currency movements which cost it 10 per cent in returns over its last half-year reporting period, to the end of September. Mr Jillings also expects this will have been detrimental in the trust's second half. However, currency exposure is not hedged. "It is too difficult to do this in terms of costs and over time I expect emerging markets currencies to produce a positive benefit," he says. "And if you want exposure to the growth dynamic driven by the growing middle class in emerging markets, you need exposure to the currencies.

Keeping costs down is important and, as of 1 April, the trust's board changed the base management fee from 0.5 per cent of gross assets to 0.65 per cent of net assets, while the hurdle for the trigger of the performance fee was raised. A performance fee cap of 1.85 per cent of average net assets per year was also set.

Source: Morningstar

Performance

Source: Morningstar as at 2 June 2014

TOP 10 HOLDINGS as at April 2014

Geographic Breakdown