Street Calls of the Week
Utilico Emerging Markets Trust’s (LON:UEM) (UEM’s) managers, Charles Jillings and Jacqueline Broers at ICM, are very excited about the company’s future in terms of available, attractive investment opportunities. Given high levels of stock market ‘noise’, they feel confident about their strategy of investing in high-quality, cash-generative, emerging market assets for the long term.
This approach has proved successful over UEM’s 20-year life, with a 9.2% average annual NAV total return and a track record of considerable outperformance versus the MSCI Emerging Markets Index. The trust has a progressive dividend policy and an above-market dividend yield, while its annual distributions are fully covered by income.
There is visible scope for a narrower discount, which would provide additional upside to the trust’s total return potential.
Exhibit 1: Above-Average Growth Prospects In Emerging Markets
Source: International Monetary Fund (IMF), Edison Investment Research. Note: IMF World Economic Outlook, April 2025 (p = projected).
Why Consider UEM?
Jillings and Broers consider that their investment team has unrivalled knowledge and understanding of UEM’s portfolio companies and sectors, which it is constantly expanding through regular travels to the emerging market regions. During these trips, team members meet with current and potential future investee businesses at both senior and operational levels, including site visits, using their developed network of local contacts.
This provides the managers with valuable information, including timely insights about changing business conditions.
In August 2025, UEM’s board announced a series of measures that it hopes will enhance the trust’s performance and narrow the discount. These were a new performance-based tender offer, regular share buybacks, further dividend increases and bringing forward the 2026 continuation vote. The proposals were well received and culminated in a recent 97.6% vote in favour of the company’s continuation, which gives UEM’s investment team a clear, five-year runway in which to shine.
Considering the current investment backdrop, many of UEM’s investments have a domestic/regional focus, so they should be relatively insulated from geopolitical noise and the effects of US tariffs. The trust offers a low beta (c 0.8) exposure to emerging markets.
Over time, the portfolio has become more defensive with a reduction in exposure to global trade (recent exits include Oceans Wilson and Santos Brasil) and an increase in companies benefiting from the growth in social infrastructure such as UEM’s two largest holdings, Orizon Valorização de Resíduos and Sabesp.
NOT INTENDED FOR PERSONS IN THE EEA
UEM: Lower-Risk Access to Above-Average Economic Growth
UEM celebrated its 20th anniversary as a public company on 20 July 2025. Between inception on 20 July 2005 and 31 July 2025, it generated an annual NAV total return of 9.1%. This equates to an aggregate total return of 470.6%, which is meaningfully higher than the MSCI Emerging Markets Index’s 349.7% total return.
Following the trust’s mandate of investment in infrastructure and utility companies, UEM’s managers provide a lower-beta way for investors to access the higher economic growth prospects in emerging markets. Most of the trust’s investee companies are asset-backed, and more than 95% of the businesses are operational.
UEM’s portfolio has a beta of around 0.8, meaning that while it is unlikely to fully participate when emerging markets are rising, there should be an element of capital protection during periods of emerging market share price weakness. More than 80% of the trust’s portfolio companies pay dividends, supporting UEM’s progressive dividend policy.
Recent Developments
In the FY25 annual report (ending 31 March), UEM’s board announced that it was reviewing the effectiveness of the company’s discretionary tender offer and how the trust may be afforded a higher valuation. On 7 August 2025, the board provided an update on proposals to increase demand for the trust’s shares, which, over time, should lead to a narrowing of its discount:
A new performance-based conditional tender offer, whereby UEM is benchmarked against the MSCI Emerging Markets Total Return Index. Performance will be measured over a five-year period. Up to 25% of the company’s issued share capital may be tendered if the trust underperforms the index in the five years ending 31 March 2030.
Continuation of the share repurchase programme, with the aim of UEM achieving and then maintaining a single-digit discount, in normal market conditions. In the last three financial years, c 28.2m shares have been bought back at a cost of c £62.2m.
Further dividend increases. UEM pays regular quarterly dividends, and the total annual distribution has increased each year since 2016. The FY25 payment of 9.125p per share was 6.1% higher than the FY24 dividend of 8.600p per share. The trust’s board is targeting future annual dividend increases. UEM is the only fund in the AIC Global Emerging Markets sector with a 10-year record of consecutive higher annual dividends, making it an AIC next-generation dividend hero.
Advancement of the 2026 continuation vote to follow the 16 September 2025 AGM, and then to be held at subsequent five-year intervals, subject to shareholder approval.
The continuation vote was duly undertaken on 16 September, and UEM received a very high level of shareholder support, with 97.63% voting in favour of the resolution; hence, the next continuation vote will be in 2030.
Currently, UEM regularly discloses its top 30 positions. The board has decided to further increase transparency by including a full holdings list in the annual report. There is also a commitment, except in exceptional circumstances, to only invest in listed companies. Unlisted businesses currently make up a modest c 2% of the trust’s portfolio.
Perspectives from UEM’s Managers
Jillings comments that there was an acceleration in exports and inventory building ahead of the implementation of US tariffs, which provided a tailwind to global economic activity for the first seven to eight months of 2025. However, he anticipates a slowdown for the rest of the year and notes that tariffs are leading to pauses in significant investment decisions.
The manager considers that Latin America remains relatively immune from US tariffs, although there is heightened risk in Brazil as the country has been in the US President Trump’s sights. As Brazil is a commodity producer, its exports are likely to be redirected from the US to other regions if tariffs become more material.
In the US, Trump ideally wants a weaker dollar and lower interest rates. However, while interest rates are important, Jillings suggests that the strength of the US economy is a bigger question. Despite short-term interest rate expectations coming down, long-term interest rates are rising, as there are widespread concerns about the level of US debt and the ability to service it.
Unfortunately, this situation is not just restricted to the United States, as other countries, including the UK, are heavily indebted.
The manager explains that a consequence of a weaker US dollar is that investors are slowly repositioning away from US exceptionalism (there have been notable fund flows out of the US and into Europe and emerging markets). Lower US interest rates also enable interest rate reductions elsewhere, which have been widespread, including in the UK, New Zealand and emerging markets. Looser monetary policy generally leads to increased confidence and higher stock markets or a lower cost of equity.
Broers recently travelled to Hong Kong, where she gleaned some interesting insights. Chinese investor sentiment is improving, but there are questions about how long the recent stock market rally will continue, as a meaningful part of the move has been due to higher liquidity rather than improving company fundamentals.
There is an intense AI and technology focus in China, and the country appears to be well-positioned to benefit from its relatively low-cost semiconductor manufacturing. Also, improved performance from Chinese chips is slowly reducing reliance on US semiconductor imports. Another interesting development is that fads, which traditionally originated in the West, are now starting in China, for example, high global demand for Pop Mart’s Labubu dolls.
Portfolio Breakdown
At the end of August 2025, UEM’s top 10 holdings made up 40.6% of the portfolio, which was a 3.4pp higher concentration compared with 37.2% 12 months earlier. Its top 30 positions made up 74.6%, which was a higher percentage than 72.9% at the end of August 2024.
Exhibit 2: UEM’s Top 10 Holdings at 31 August 2025
Source: UEM, Edison Investment Research. Note: *Companhia de Saneamento Básico do Estado de São Paulo.
UEM’s active share is around 98%, which is a measure of how the fund differs from its reference index, with 0% representing full index replication and 100% no commonality. This is unsurprising given the trust’s specialist mandate and fundamental stock selection. Notable differences between UEM’s portfolio and the MSCI Emerging Markets Index include the trust’s lack of financial stocks, which make up a quarter of the index.
Brazil remains UEM’s largest country exposure, despite a reduced allocation over the last few quarters, which compares with a modest mid-single-digit index weighting. The trust has only one holding in Taiwan, which is the second-largest weighting in the MSCI Emerging Markets Index, approaching 20%, and UEM has a similarly sized below-index weighting to China.