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Utilico Emerging Markets Trust
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==Current portfolio positioning== At end-February 2022, UEM’s top 10 holdings made up 29.8% of the portfolio, which was lower than 31.9% a year before; seven positions were common to both periods. Jillings is encouraged by the fact that dividends are coming through strongly from a number of portfolio companies; for example, within the top 30 holdings, Sonatel increased its dividend by 15%, Telecom Egypt by 33%, KT Corp by 42% and Citic Telecom by 7%. UEM’s portfolio is widely diversified by industry and geography, as shown in Exhibit 3. The trust holds only one London-listed company operating extensively in Russia: rail freight operator Globaltrans Investment, which was worth £4.3m (0.8% of the portfolio) as at 31 January 2022. During February, the manager sold around two-thirds of this position, realising £1.5m in proceeds. Globaltrans has not been sanctioned; ICM has a strong compliance and risk framework and will continue to ensure that UEM complies with any new sanctions as they emerge. Globaltrans’s shares have now been suspended and the residual holding has been written down to zero. The trust has no direct investments in Ukraine, and its European exposure, primarily investments in Romania, Poland and Bulgaria, was 11.7% of the portfolio at 28 February 2022. Alupar Investimento is a Brazilian electricity generation and transmission company that has a growing number of projects including four new transmission lines. Its recent earnings results showed strong EBITDA growth helped by inflation-adjusted pricing. The manager reports that this holding has been a significant and successful investment for UEM which has been in the fund for nine years. Some portfolio companies are finding business conditions more challenging, such as Gujarat State Petronet, which is an Indian gas transmission and distribution company that is experiencing higher liquified natural gas (LNG) input costs. The company has put through three rapid tariff hikes, but these have not kept pace with the rate of higher LNG prices, which is squeezing its margins. However, the manager considers that this situation is temporary, and margins will improve. UEM’s relative performance is shown in Exhibit 6. It has performed particularly well versus the MSCI Emerging Markets Index over the past 12 months and is also ahead over the last decade. The trust’s NAV has outperformed the MSCI Emerging Markets Utilities Index over the last five and 10 years, while its share price has also modestly outperformed over the last three years. Jillings explains that during the pandemic, companies involved in digital technology and working from home performed very well. However, since COVID-19 vaccines were approved in November 2020, there has been a steady rotation back into value and cyclical stocks, while technology stocks have come under pressure. Hence, the manager is unsurprised that UEM has performed so well versus the MSCI Emerging Markets Index over the last year. Meanwhile, he suggests that the valuation metrics of UEM’s portfolio are more attractive now than they have been over the last 15 years. There are 13 funds in the AIC Global Emerging Markets sector, of which UEM is the fourth largest. The trust has a unique strategy so cannot be directly compared with its peers, although the table above does provide some context. UEM’s NAV total return is above average over the last 12 months, ranking fifth, although it is below the mean over the other periods shown. This is unsurprising given the lower-beta nature of its investments and a strong bull market over the last decade. These returns do not take the dilutive effect of the trust’s historical subscription shares before February 2018 into account. UEM’s valuation is currently the ninth highest in the peer group, where no funds are trading at a premium. It has a below-average ongoing charge and a level of gearing that is in line with the mean. The trust’s dividend yield is the sixth highest in the peer group, 1.1pp above the average, and Jillings reports that UEM is one of the very few funds in the group that had a covered dividend during the pandemic.
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