Emerging markets have suffered several years of underperformance but weighty discounts to net asset value (NAV) mean that some investment trusts focused on the area could now offer good value. Those include IC Top 100 Fund Utilico Emerging Markets (UEM) which is trading at a 7.14 per cent discount to its NAV, wider than its 12 month average discount of 6.59 per cent.
- Strong long-term performance
- Attractive yield
- No exposure to volatile commodities
- Discount to NAV
- Performance fee
- Exposure to Malaysia Airport Berhad
- Recent underperformance
There are some key reasons for that discount and make no mistake: this is a high-risk and long-term play but one which could pay off. The fund has underperformed the MSCI Emerging Markets Index over the past year and has 7 per cent of its holdings in Malaysia Airport Holdings Berhad (MAHB:MK), which has seen its share price plummet since the MH370 and MH17 disasters last year. Share price total return over the past year was 8.82 per cent compared to 10 per cent return on the MSCI Emerging Markets index. By contrast, the cumulative share price return over five years is 77.53 per cent compared to a benchmark return of 13.1 and over three years Utilico posted a return of 41.05 compared to the benchmark’s 9.43 per cent.
Since inception in 2005 the trust has achieved an average annual compound total return of 12.4 per cent.
Unlike other emerging markets funds, Utilico offers exposure to a broad range of infrastructure companies across the region that look set to be high-growth investments in coming years. The fund operates a strategy of offsetting emerging market risk by investing in infrastructure, transportation and utilities companies that it believes have a market edge. We first tipped the fund in 2010 due to its potential to offer long-term dividend growth at a relatively low price and those factors still stand. The trust doesn't have exposure to more volatile commodities, and also offers good potential for income investors through exposure to utility related companies.
The trust currently offers a dividend yield of 3.15 per cent and its most recent quarterly dividend was up to 1.525p per share.
The fund's holdings include China Gas Holdings (384:HK), APT Satellite (1045: HK) and China Everbright (165: HK), all of which performed well in 2014. However, its exposure to Malaysia Airport Holdings Berhad is undeniably risky. The trust predicts that "short term there will be headwinds" due to capacity but if passenger demand is resilient in future years, as the trust predicts, this could be a good long-term investment.
Gasco (SGO: GASCO) is also a more volatile bet. The share price suffered in 2014 due to uncertainty over the Chilean government’s energy reform plans and an investigation into the profitablity of Metrogas, Gasco’s main asset. However, following the publication of independent reports, and the resulting proposals for legislation which have a milder impact than the market had expected, Gasco shares have regained lost ground.
The trust has a reasonable ongoing charge of 0.90 per cent. But the manager is entitled to receive a performance fee, so this could rise if performance improves. The performance fee is calculated based on 15 per cent of any outperformance of adjusted equities funds attributable to shareholders in excess of its benchmark index.
We think the trust is an interesting addition to a portfolio for an income investor who needs emerging markets exposure and is comfortable with high risk. Buy.
Utilico Emerging Markets (UEM) | |||
|---|---|---|---|
| PRICE | 193.75 | GEARING | 4 |
| AIC SECTOR | Emerging markets | NAV | 207.15 |
| FUND TYPE | Bermuda domiciled investment company | PRICE DISCOUNT TO NAV | -7.14 |
| MARKET CAP | £413.16 | YIELD | 3.15 |
| ONGOING CHARGE | 0.9 | MORE DETAILS | http://www.uem.bm/ |
| SET-UP DATE | 20 July 2005 | ||
Source: Morningstar, as at 13 January 2015
| Performance | Cumulative share price return 1-yr (%) | Cumulative share price return 3-yr (%) | Cumulative share price return 5-yr (%) |
|---|---|---|---|
| Utilico Emerging Markets Ord | 8.82 | 41.05 | 77.53 |
| AIC Global Emerging Markets sector average | 2.38 | 12.17 | 27.97 |
| MSCI EM NR GBP | 10.00 | 9.43 | 13.10 |
Source: Morningstar, as at 13 January 2015
Top 10 holdings (as at 30 November 2014)
| Holding | % |
| Malaysia Airport Holdings Berhad | 7.1% |
| MyEG Services Berhad | 6.9% |
| International Container Terminal Services Inc. | 6.8% |
| China Gas Holdings Ltd | 6.8% |
| Ocean Wilsons Holdings Limited | 5.5% |
| APT Satellite Holdings Limited | 5.2% |
| Eastern Water Resources Development and Management PCL | 5.0% |
| China Everbright International Limited | 3.6% |
| Asia Satellite Telecommunications Holdings Limited | 3.5% |
| Gasco SA | 3.0% |
Geographic breakdown (as at 30 November 2014)
| Region | % |
| China incl. Hong Kong | 31.8 |
| Malaysia | 16.3 |
| Brazil | 14.5 |
| Philippines | 8.0 |
| Europe | 6.5 |
| Other Far East | 6.2 |
| Thailand | 6.0 |
| Other Latin America | 5.8 |
| Middle/ East Africa | 4.9 |
