NAV outperformance versus the MSCI EM Index over the last three years

Source: LSEG Data & Analytics, Edison Investment Research

Why consider UEM?

As sentiment towards the US continues to sour in response to Trump’s trade policies, now could be an opportune time to consider emerging markets. Many of UEM’s investments have a domestic or regional focus and so should be relatively insulated from US tariffs. Jillings and Broers report that in general, UEM’s portfolio companies are performing well, with top-line growth due to both increased volumes and higher pricing, along with margin expansion. They consider that emerging market valuations are very attractive, particularly in Brazil and Mexico. Looking back, the managers note that many of UEM’s investee businesses have been able to successfully execute their business strategies over the years despite regular political and inflation risks and are therefore well-placed in today’s environment.

UEM offers a low beta (c 0.8) exposure to regions with above-average growth prospects. The portfolio is actively managed, with a long-term focus, and had a forward P/E multiple of 12.9x at 31 March 2025, which was modestly higher than the reference index. UEM has a progressive dividend policy and an above-market dividend yield, while its annual distributions are fully covered by income. Although investment company discounts are wider than average during a period of elevated investor risk aversion, UEM’s valuation looks somewhat unjust given its high-quality investments and positive long-term performance record.

UEM: Defensive emerging market exposure

UEM looks like an interesting investment opportunity, particularly now when the global investment backdrop is so uncertain. The trust has a unique mandate, investing in emerging markets infrastructure and utility companies. Most of the portfolio is asset backed and more than 95% of the businesses are operational. UEM has a low beta portfolio of around 0.8, which means there should be some element of capital protection in down markets, although the portfolio is unlikely to fully participate during periods when markets are rising. More than 80% of the trust’s portfolio companies pay dividends, which supports UEM’s progressive dividend policy.

The trust has a long-term record of outperformance. Since inception in July 2005 until 31 March 2025, UEM’s +8.8% annual NAV (+427.6% absolute) total return was meaningfully ahead of the MSCI Emerging Markets Index’s +7.3% annual (+303.5% absolute) total return.

Perspectives from UEM’s managers

Jillings and Broers note that corporate profit trends are less predictable in the current uncertain economic environment. Q424 results were strong as companies locked in business ahead of US President Trump’s inauguration in January 2025. While Q125 expectations for economic activity were modest, the managers suggest that there could have been an acceleration before the announcement of Trump’s trade policies. They believe that the widespread imposition of tariffs and the haphazard way in which they were executed will be damaging to the global economy; one of the outcomes is that investment decisions are likely to be delayed. Jillings and Broers comment that during his first term in office, once Trump’s trade policies were decided, he did not go back on them. However, in his second term, the chopping and changing on the level of tariffs put significant pressure on global stock markets, which the president seemed to ignore until the US bond market started to react.

Investor selling of US equities and US dollar-based assets has led to a weaker US currency and higher US bond yields. In normal circumstances, one would expect a risk-off market to result in higher demand for US Treasury bonds (lower bond yields), but the threat of reciprocal tariffs brings the risk of higher US inflation, which is feeding into the bond market, and yields are rising. This is problematic for the US president due to the costs involved to service America’s huge level of debt with bond yields at their current levels.

The managers consider that Latin America may be well-placed despite the delicate global macroeconomic environment, as the region seems somewhat under the radar of Trump’s tariffs. The Latin American economy is largely driven by commodities, both hard and soft, for which there is widespread demand, and Trump has not yet sought to disrupt the Mexican manufacturing supply chain as much as expected. This suggests that Latin America should be relatively insulated from the US/China trade war and can continue to trade with both parties; meanwhile, valuations in the region remain very attractive. Also, many of UEM’s portfolio companies are defensive, with domestic or regional businesses that can continue to grow despite global frictions and developments in Washington. These include Orizon Valorização de Resíduos, a Brazilian waste management company that is benefiting from both higher waste volumes and ‘gate fee’ pricing, and is increasing its higher-margin biogas energy generation and trading of green carbon credits, which are a by-product of its core waste management operations. Another example is Sabesp, which is a São Paulo-based water and waste management company that is investing substantial capex, which should be rewarded under its regulatory framework, and is looking at making domestic acquisitions; these are growth initiatives that should be unaffected by US trade policies.

Portfolio breakdown

UEM’s portfolio has around 70 holdings and its annual turnover is c 25%. At the end of March 2025, UEM’s top 10 positions made up 37.6% of the portfolio, which was a modestly higher concentration versus 35.6% a year earlier; five positions were common to both periods.

Exhibits 2 and 3 show UEM’s breakdowns by geography and sector at the end of March 2025. A complete comparison is not possible as some elements are not stated separately. However, there are some changes of note. Over the year to the end of March 2025, UEM has a lower allocation to Brazil, which was largely due to the sale of the trust’s holding in port operator Santos prior to the company being taken private. By sector, there is a higher weighting in water & waste stocks. These companies provide relatively economically insensitive essential local services, with potential to move into higher value-added businesses.

Because of its specialist mandate and bottom-up stock selection, UEM’s weightings will be very different to those of the MSCI Emerging Markets Index. Differences include Brazil and China, which make up c 4% and c 31% of the index respectively, making UEM around 18pp overweight Brazil and around 18pp underweight China.

UEM’s managers have identified four global megatrends (including two referred to as infra, rather than infrastructure) that they believe will support the growth of the trust’s portfolio companies for many years to come. Below, we highlight how the fund was broken down by megatrend at the end of March 2025, along with a relevant portfolio holding.

• Social infra (33.8%) is based on the increased need for social infrastructure such as sanitation, water supply and transportation networks. This is driven by a rising emerging market middle class, with higher levels of disposable income and the ongoing shift to urbanisation. Manila Water (62.2% owned by the Razon family) provides water in the Philippines, serving a population of around 12 million, but also has operations in Vietnam, Thailand, Indonesia and Saudi Arabia. The company operates across the water value chain, from water source management, transmission, treatment and distribution, to wastewater treatment. Manila Water's main concession has a 12% guaranteed return on expenditure and does not expire until 2047. Its current five-year regulatory period is 2023–27, during which there are annual base tariff increases and inflation adjustments.
• Energy growth & transition (26.2%) includes investment in renewable energy areas such as wind, solar and hydroelectric, as well as supporting grid infrastructure, which is required to support economic growth and increase energy security. Eletrobras is the largest utility company in Latin America. It is a leader in renewable energy with 22% of Brazil’s installed capacity (c 96% hydroelectric) and 38% of Brazil’s transmission lines. The company was privatised in June 2022, although the Brazilian government retains a 43% stake. Post-privatisation efforts have focused on cost reduction, improved asset management and boosting investment capacity.
• Digital infra (25.0%) is required as digital connectivity investment is occurring very rapidly, thereby driving strong demand for data centres. SUNeVision (majority owned by Sun Hung Kai Properties) is Hong Kong's leading data centre operator, with eight data centres and two cable landing stations spread across Hong Kong and serving different market requirements and price points. Hong Kong remains a major regional hub for data hosting and interconnection, and the company’s flagship Mega-i data centre is the leading data interconnection point in Asia. In recent years, SUNeVision invested heavily in expanding capacity to meet demand. It was funded by additional debt in a higher interest rate environment, which put pressure on the company’s share price and created an attractive entry point for UEM. The benefits of the investment are showing up in SUNeVision’s results and its management team is very bullish about future demand, in part driven by AI applications. The company is currently building out further capacity to meet 2026–27 expected demand.
• Global trade (15.0%) is expected to continue regardless of Trump’s trade policies, with emerging markets making up an increasing share of global activity. Piraeus Port Authority (PPA, 67% owned by Chinese company Cosco Shipping and 7% by the Greek government) is the concession owner of Piraeus Port, which is one of the largest transhipment ports in Europe. H224 results were solid due to a strong rebound in throughput versus a weak H223, a robust Greek economy, record tourist numbers and the adaptation of global shipping lines to the Red Sea disruption. Despite PPA’s share price performing very strongly due to solid operational performance and the potential acquisition of a competitor at a much higher valuation, the company remains very attractively priced.

The emerging markets investment backdrop

Until the 2025 sell-off, global equities had outpaced the performance of emerging market and emerging market utility stocks over the last two years by a wide margin. This was largely due to the ‘Magnificent 7’ US large-cap technology stocks, which performed particularly well as they were viewed as beneficiaries of the growth in AI. These stocks have come under significant pressure in a volatile market where investors have concerns about the impact of President Trump’s widespread imposition of tariffs and the risk of a slowdown in the global economy.

The International Monetary Fund (IMF) has recently released the April 2025 update to its World Economic Outlook. Unsurprisingly, given the current headwinds, projections for world economic growth have been reduced significantly. For the world and advanced economies, projected GDP growth for 2025 and 2026 has been revised down by 0.5pp and 0.3pp respectively, while emerging and developing economies have seen a similar reduction for 2025 and a modestly larger cut of 0.4pp to GDP growth in 2026. The US is a notable contributor to the outlook for lower global growth with a decline of 0.9pp in the 2025 and 0.4pp in the 2026 GDP growth projections; the IMF cites ‘greater policy uncertainty, trade tensions and softer demand momentum’. The projected differentials between higher growth in emerging and developing versus advanced economies remain noteworthy at 2.3pp for 2025 (in line with the January 2025 outlook) and 2.4pp for 2026 (down modestly from 2.5pp in the January 2025 outlook).

As has been the case for a long time, emerging market stocks look very reasonably priced versus the global market. This is especially true for Latin America, which at 31 March 2025 was trading on a forward P/E multiple of 8.4x, a 30% discount to emerging markets. Brazil, at around 60% of Latin America, is a standout, as it was trading on a forward P/E multiple of just 7.5x. While emerging markets had become somewhat irrelevant to many global investors as the US was ‘the only game in town’, this looks to be changing. Judging by the stock market action so far in 2025, led by Trump’s policy decisions, investors could become more interested in emerging markets’ higher growth prospects as they look to redeploy assets formerly invested in the US.

Performance: Ahead of the reference index over three and five years

The AIC Global Emerging Markets sector is a diverse mix of funds; some are generalists, while others have a specialised mandate including UEM with its differentiated focus on utility and infrastructure assets. Its NAV total returns are above average over the last three, five and 10 years. Morningstar’s performance data on UEM does not add back the dilutive effect of its historical subscription shares before February 2018. The trust currently has the widest discount, an ongoing charge that is modestly below the mean and is one of four funds that is geared. UEM has an attractive dividend yield, ranking second and 1.8pp above the sector average.

Looking at UEM’s relative performance in Exhibit 12, compared with the MSCI Emerging Markets reference index, the trust is ahead over the last three and five years, while lagging over the last 12 months and 10 years, albeit modestly over the last decade. It is important to reiterate that the managers invest independently in their best long-term fundamental ideas, without reference to the index weightings.

Jillings explains that over the last 12 months, Latin American companies have posted good results but have taken a significant currency hit. Also, Petalite, which forms part of UEM’s 2.5% current investment in private companies, operates in the electric vehicle charging market. Investors became very excited about the company’s growth prospects, but their enthusiasm subsequently reversed.

UEM’s upside/downside analysis

UEM offers a specialised yet defensive exposure to emerging markets. In Exhibit 14, we show the trust’s upside/downside capture over the last decade. In months when emerging markets stocks rose, on average, UEM captured 68% of the upside, whereas in months when emerging markets declined, the trust captured just 60% of the downside.

Dividends: Fully covered, growing annual distribution

More than 80% of portfolio companies pay dividends. UEM makes quarterly distributions in September, December, March and June, and the annual distribution has increased or been maintained every year since the company was launched in July 2005. The five-year compound annual dividend growth rate is 3.6%.

In FY24, UEM’s revenue per share declined by 6.1% to 8.83p versus 9.40p in FY23, although this was sufficient to cover the annual dividend of 8.60p per share, which was 1.8% higher than 8.45p per share in FY23. At the end of FY24, UEM’s revenue reserves were 5.29p per share, which is equivalent to c 0.6x the last annual dividend. So far in FY25, three interim dividends per share have been declared. The first was 2.15p per share (flat year-on-year), while the second and third were 2.325p per share (+8.1% year-on-year).

Discount: Low valuation appears unjustified

In the current uncertain macroeconomic environment, it is unsurprising that UEM is trading at a discount. However, what is more difficult to understand is why the trust’s discount is wider than those of its peers. The nature of UEM’s assets means that its investee companies’ earnings and cash flows should hold up relatively better during a global economic slowdown. The current 16.8% discount is well above the board’s desired sub-10% level and is wider than the three-, five- and 10-year average discounts of 15.8%, 14.7% and 13.0%, respectively.

The board typically repurchases UEM’s shares when the discount has widened to more than 10% in normal market conditions. In FY25, c 4.4m shares (c 2.2% of the share base) were bought back at a cost of c £9.6m.

Fund profile: An emerging market equity specialist

Launched in July 2005, UEM was historically a Bermudan investment company, but redomiciled to the UK as an investment trust via a scheme of arrangement on 3 April 2018. It is listed on the Main Market of the London Stock Exchange and is managed by ICM Group (ICM and ICM Investment Management), a specialist fund manager based in Bermuda and the UK with c $37.0bn of assets under management at 31 December 2024 (c $1.1bn held directly and c $35.9bn held by investee and affiliated companies). ICM Group has more than 80 employees, who operate from 10 offices around the globe.

UEM is managed by Charles Jillings, since the fund was launched, and Jacqueline Broers, who was appointed joint portfolio manager on 2 January 2025. She has been involved in the management of UEM since joining ICM in 2010 and was appointed as the trust’s deputy portfolio manager in 2021. Jillings and Broers aim to generate an attractive long-term total return from a diversified portfolio of emerging market equities, primarily in the infrastructure, utility and related sectors. They employ a bottom-up stock selection process and are unconstrained by benchmark allocations, although the MSCI Emerging Markets Index is used as a reference.

To mitigate risk, there is a series of internal investment guidelines in place (as a maximum percentage of gross assets at the time of investment): individual investment 10%; single country 35%; individual sector 25%; unquoted investments 10%; and top 10 holdings 60%. Gearing of up to 25% of gross assets is permitted. The trust’s currency exposure is unhedged. From launch to the end of March 2025, UEM’s NAV total return compounded at an annual rate of 8.8%.

Investment process: Diligent bottom-up stock selection

Jillings and Broers seek to identify and invest in companies, predominantly in the infrastructure and utility sectors, which are trading at a discount to their estimated intrinsic value and which they believe have the potential to generate total returns of at least 15% pa, at an investee company level, over a five-year horizon. The focus is on emerging market countries with positive attributes such as political stability, economic development, an acceptable legal framework and an encouraging attitude to foreign investment.

UEM’s investment team has a long-term investment horizon and avoids short-term stock market ‘noise’. It can draw on the expertise of professionals in ICM’s regional offices and has direct relationships with companies and local brokers, who can highlight changes in business conditions. There is a lot of travel involved, meeting with company managements and their operating assets. ICM is often the first phone call when an infra/utility IPO is announced, and its investment specialists are used as sounding boards ahead of companies listing. UEM’s investment team is supportive of its investee firms in terms of their capital requirements by participating in follow-on equity offerings at the right price and, given its speciality, the trust is often a well-regarded shareholder for many of its investee companies.

Stocks are selected on a bottom-up basis following thorough fundamental research (including the construction of a detailed financial model and valuation targets) from an investible universe of more than 1,000 companies. There are c 70 holdings in the portfolio (typical range of 60–90). UEM has an active share approaching 100% versus the MSCI Emerging Markets Index; this is a measure of how a fund differs from an index, with 0% representing full replication and 100% no commonality.

Because of the nature of UEM’s investments in companies providing essential services, the trust has tended to underperform the MSCI Emerging Markets Index during a cyclical upturn led by sectors such as technology and consumer discretionary, while outperforming in a falling market.

UEM’s approach to ESG

While UEM is not an ESG fund, its board believes it is in shareholders’ best interests to consider environmental, social and governance (ESG) factors when selecting and retaining investments. In conjunction with assessing the financial, macroeconomic and political drivers when making and monitoring an investment, the managers embed ESG opportunities and risks into the trust’s investment process. Companies are scanned using a rigorous in-depth framework; however, the decision whether to make an investment is not made on ESG grounds alone. The managers can consider a potential investment with a low ESG score but this will need to be outweighed by an attractive total return potential. Every investee company’s ESG footprint is analysed, and there is often still room for improvement at some of these businesses. The managers work to understand a company’s ESG journey and seek an improving score.

Factors are incorporated into the trust’s investment process in three main ways:

1. Understanding: in-depth analysis of the key issues that face potential and current holdings, as well as a deep understanding of the industry in which they operate.
2. Integration: incorporation of the output of the ‘understanding’ into the full financial analysis to ensure that a clear and complete picture of the investment opportunity is obtained.
3. Engagement: communication with investee companies on the key issues on a regular basis, both virtually and on location, where possible, to discuss and identify any gaps in their ESG policy to further develop and improve their disclosure and implementation.

ICM is a signatory to the United Nations-supported Principles for Responsible Investment, a code of best practice for incorporating ESG issues.

Gearing

Having repaid its bank debt to The Bank of Nova Scotia on maturity in March 2024, on 30 August 2024, UEM entered into a £50.0m multicurrency revolving credit secured bank facility agreement with Barclays Bank. At the end of March 2025, net gearing was 2.8%.

Fees and charges

ICM is paid a management fee of 1.00% of UEM’s NAV up to £500m; 0.90% above £500m up to £750m; 0.85% above £750m up to £1bn; and 0.75% above £1bn. A tiered fee structure allows shareholders to benefit from the increasing economies of scale that a larger portfolio provides. In H125, UEM’s ongoing charge ratio was 1.5%, which was in line with FY24.

Capital structure

UEM has 186.3m ordinary shares in issue and its average daily trading volume over the last 12 months was c 257k shares. The trust has a five-yearly continuation vote, with the next due at the September 2026 AGM. The September 2021 vote was passed with 84.2% of shareholders voting in favour of UEM’s continuation.

The board

UEM’s board has four independent, non-executive directors. Their fees (net of taxes) are used to acquire UEM shares, ensuring all shareholders’ interests are aligned.