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Get into cheap emerging markets with Utilico

Emerging market sentiment might have fallen too far. Buy Utilico at a snip to benefit from a long-term shift in sentiment
November 25, 2015

Emerging markets are suffering rock bottom investor sentiment, meaning the prices of investment trusts in the sector have come tumbling down. Even if markets only tick up slightly from here - there are still plenty of headwinds to navigate - low prices and wide discounts mean you could take home good returns over the long term.

IC TIP: Buy at 171p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points
  • Shares are cheap relative to history
  • Beaten the index over the long term
  • Good income stream and dividend increases
  • Defensive positioning
Bear points
  • Large China exposure
  • Performance fee

That makes now a good time to pick up IC Top 100 fund Utilico Emerging Markets (UEM), which has beaten its benchmark consistently over the long term and delivers a good income stream, too. The fund's share price has fallen dramatically since we last tipped it in January, when it was trading at 193.75p with a net asset value (NAV) of 207.15p, a discount of 7.14 per cent. Today shares cost 171p and its discount has widened to 8.1 per cent.

That is despite the trust's solid performance. In three years it has returned 16.5 per cent compared with a loss of 3.9 per cent for the index and over 10 years it has returned 127.3 per cent compared with the MSCI Emerging Markets index return of just 82.6 per cent. The trust's more defensive focus on utilities and companies paying good dividends makes it a less nerve-racking play than other emerging markets investments, while still well-poised to embrace a market upturn when it takes hold.

There are plenty of reasons to be nervous about emerging markets. The Chinese-led market crash in August had a brutal impact on the region this year, with the MSCI Emerging Markets index crashing 26.9 per cent in four months between 22 April and 25 August 2015. Add to that a global commodity rout, the impact of the strong dollar on the cost of emerging market debt and the anticipated rise in US interest rates and it could seem like nothing but bad news for emerging markets.

However, those fears might now be overdone and markets may have fallen too far. Even if they do not rally dramatically, any upward trend will be good news if you invest now. Brian Dennehy, managing director of fund research and dealing site FundExpert.co.uk, says: "Emerging markets as a whole are now cheaper than in both the 2008 slump and at the nadir of the Asian financial crisis in 1997-98. Yet there is no single 'crisis' now which has dragged global emerging markets lower."

He says the concerns are all reflected in the price and argues that "this is precisely the point when more thoughtful, and less nervous, investors should start looking for opportunities".

Utilico Emerging Markets has outperformed peers and the index and is arguably less risky than trusts more exposed to commodities. It focuses on sectors and companies displaying the characteristics of essential services or monopolies, such as transport infrastructure and utilities and looks for companies with strong balance sheets. Examples include MyEG, an online government services company reporting revenue growth of 28.8 per cent in its last full-year accounts.

One potentially offputting area for investors is the trust's concentration in China - the country still accounts for 28.4 per cent of total holdings. However, the trust has recently reduced its exposure and sold several positions after a strong market rally, taking profits from the trades. Holdings in the region include China Gas Holdings, which it argues is continuing to deliver strong performance despite the market backdrop and has the potential to increase market share.

The trust's ongoing charge of 1.85 per cent is due to the inclusion of a performance fee based on 15 per cent of any outperformance of adjusted equity funds attributable to shareholders in excess of a benchmark index. The management fee was also increased between 2014 and 2015 from 0.5 per cent to 0.65 per cent of gross assets.

We first tipped the fund as a 'buy' in 2010 due to its potential to offer long-term dividend growth at a relatively low price, and that remains true today. When we last tipped it in January, the fund had a dividend yield of 3.15 per cent. That now stands at 3.6 per cent. Utilico has either increased or held its dividend at the same level each year since launch. In its September 2015 half-year report, the trust announced it was to increase the quarterly dividend payment for the second quarter and said it expects to maintain it at that level for the next two quarters despite experiencing tough market conditions. That is a key benefit of its revenue reserves, which stood at £15.6mon 30 September. In three years the dividend has increased by 25 per cent. Buy.

 

IC TIP RATING
Tip style:INCOME
Risk rating:HIGH
Timescale:LONG TERM

 

UTILICO EMERGING MARKETS (UEM)

PRICE:171pGEARING:107%
AIC SECTOR:Global Emerging MarketsNAV:186.13
FUND TYPE:Bermuda domiciled investment companyPRICE DISCOUNT TO NAV:-8.13%
MARKET CAP £364.70mONGOING CHARGE*:1.85
YIELD (%):3.63MORE DETAILS:utilicoemergingmarkets.com
SET-UP DATE:20-Jul-05  

Source: Trustnet, as at 24 November 2015, *The Association of Investment Companies

 

Performance (cumulative total returns %) of Utilico Emerging Markets

Customise Columns1m3m6m1yr3yr5yr10yr
Utilico Emerging Markets 0.411.0-10.0-12.116.527.5127.3
 MSCI Emerging Markets -1.77.7-15.7-11.1-3.9-8.482.6

Source: FE Analytics, as at 24 November 2015

 

Top 10 holdings

Holding%
MyEG Services Berhad6.9
China Gas Holdings Ltd6.7
Malaysia Airport Holdings Berhad6.1
APT Satellite Holdings Ltd5.9
Eastern Water Resources Development and Management PCL5.6
International Container Terminal Services Inc5.4
Ocean Wilsons Holdings Ltd4.4
Gasco SA2.9
Transelectrica SA2.4
China Resources Gas Group Ltd 2.3

Source: Utilico Emerging Markets, as at October 2015

 

Geographic exposure

Region%
China incl Hong  Kong30.2
Malaysia13.8
Brazil 9.8
Romania7.4
Philippines 7.1
Thailand6.9
Middle East/ Africa6.2
Chile5.3
India 4.5
Other Asia3.8
Other Latin America2.6
Other Europe 2.4

Source: Utilico Emerging Markets, as at October 2015