A less volatile way to invest in the emerging markets: Utilico Emerging Markets

The slowdown in China has had a big impact on many of the world’s emerging economies. This has undermined local share prices, with the MSCI Emerging Markets index falling 2% in both 2013 and 2014, with a further 4% decline in the first seven months of this year.

Despite the recent poor performance most investors will want to retain a modest exposure to the region in order to benefit from its long-term growth prospects. One of the safest ways to do this is via the London-listed investment company, Utilico Emerging Markets (UEM).

The fund aims to provide a long-term return by investing in infrastructure, utility and related sectors in the emerging markets. These are some of the least volatile areas available with the managers concentrating on companies that provide essential services or those that enjoy monopoly positions.

At the end of July the main sector weightings were gas distributors (16.7%), port operators (15.5%) and electricity providers (13.6%). The other key exposures were to areas such as satellite operators, airports and water/waste management companies.

Its largest geographic allocation is the 28.8% invested in China. This is mostly via the H shares traded in Hong Kong, which have avoided the worst of the recent fallout. The biggest shareholding in the country is China Gas Holdings, which has risen strongly despite the widespread turmoil affecting most of the local stock market.

UEM’s second largest weighting is Malaysia, where it has a 16.2% exposure. The two main holdings are the airports operator, Malaysia Airports, and MyEG Services Berhad, which is the online portal that delivers government services over the internet. Its other key allocations include Brazil, the Philippines, Romania and Thailand.

Utilico Emerging Markets has net assets of £425.9m, which are divided between 84 different holdings. Total borrowings are just £17.3m, although there is scope to increase this to £50m under the existing agreement with its lender.

Utilities and essential services are much less volatile than other areas of the market and this is reflected in the recent performance. In the last 12 months the MSCI Emerging Markets index has lost 13.5% of its value whereas the fund’s NAV is only down 5.4%. Since it was launched in July 2005 UEM has achieved an impressive annual average compound return of 11.6%.

Despite the strong long-term returns the negative sentiment towards the emerging markets has pushed the shares to an 11% discount to NAV, which is the sort of level that the Board tend to invoke their buyback programme. The quarterly dividends of 1.525 pence are equivalent to a historic yield of 3.6%.

UEM is not immune from the wider performance of the emerging markets, but buying on the dips when the discount widens like this will enable you to get a good entry price that should pay off once the region has got through its current difficulties. These are prized assets that should appreciate in value when economic activity in the region picks up.