In the latest Monday Manager interview, Portfolio Adviser speaks to Jacqueline Broers, co-portfolio manager of the Utilico Emerging Markets investment trust, which is run alongside Charles Jillings, about EM megatrends and the major tailwinds in emerging markets infrastructure.
What role can Utilico Emerging Markets investment trust play in an investor’s portfolio?
Utilico Emerging Markets (UEM) focuses primarily on investing in utility and infrastructure assets within the emerging markets. UEM’s sector focus, actively managed, benchmark agnostic investment approach means UEM’s portfolio is highly differentiated and diversified from a traditional emerging market fund. This is clearly reflected by UEM having an active share (measure of correlation to the MSCI EM Index) of over 98%. UEM can therefore add diversity to an investor’s portfolio.
With the majority of UEM investments being asset-backed, relatively non-cyclical, income-orientated, these characteristics provide resilience, especially given the current macro volatility and geopolitical uncertainty that is being witnessed. Many of UEM’s assets continue to perform well operationally, trading through the noise.
Given UEM’s bottom-up investment focus and drive to find the best 60-70 investments to provide investors with an attractive absolute long-term total return, UEM’s differentiated and diversified portfolio should be a staple investment trust in anyone’s portfolio.
See also: Data centres and deglobalisation: Inside £420m Utilico Emerging Markets portfolio
What are some of the main megatrends you see in emerging markets today?
We see four global megatrends impacting emerging markets: energy growth and transition, greater social infrastructure needs, digitisation and global trade.
Energy growth and transition: As energy demand in EM rises, driven by increased usage of electricity, especially for transportation, housing, industrial use etc, the need for additional generating capacity is increasing. This is accompanied by a greater focus on renewable sources over fossil fuel, as countries continue to look to decarbonise while strengthening energy security.
Social infrastructure: As emerging markets’ prosperity grows, the middle class is rapidly developing and citizens are seeking a better quality of life, through improved social infrastructure such as roads, public transport, airports, water and sanitation, environmental protection, health care and education.
Digitalisation: Cheaper digital technology and enhanced digital infrastructure are driving rapid smart phone adoption and usage, even in the most frontier markets, leading to new and innovative business models, efficiencies and improved accountability.
Global trade: Notwithstanding the recent geopolitical and macroeconomic noise, cross-border trade continues to grow, with emerging markets becoming a more predominant player in global trade. Ports and the logistics sector are therefore expected to grow and evolve, offering attractive investment opportunities.
And how are you playing those in the portfolio?
Each of our infrastructure investments generally benefits from at least one of these megatrends, and we believe our geographically diverse, bottom-up portfolio of compelling companies is well positioned to take advantage of these long-term trends. Some examples of our largest investments include:
- Orizon, a waste management operator in Brazil, which is benefitting from changes in environmental legislation; (social infrastructure)
- International Container Terminal, a growing global operator of container ports, most of which are in emerging markets; (global trade)
- Indigrid, a power transmission grid operator, a play on electricity consumption growth in India (energy growth and transition) and
- KINX, a Korean data centre operator, which is benefitting from growth in demand, driven by AI and cloud services (digital infrastructure).
See also: Why now for emerging markets?
Given the trust plays on global trade, how much of a shock were US tariffs in April, and how do you see the outlook developing from here?
No one quite anticipated the severity of Trump’s ‘door-in-the-face’ approach to trade negotiations, which came to the fore on Liberation Day. While we have witnessed a necessary pull back from the extreme levels given gradual rapprochement, the world remains acutely aware of the fragile equilibrium that now exists. The result has been significant trade rerouting, as supply chains reconfigure to the new tariff landscape and move to insulate themselves from further shocks.
In addition to the ongoing China plus one initiatives, driving nearshoring and friendshoring away from Chinese imports, there is now a US plus one shift, with exporters seeking alternative markets to the US. Over the longer term, we expect global trade to continue expanding, underpinned by growth in global GDP, that is increasingly weighted towards the faster growing emerging market economies.
It is through this lens that our investment decisions are shaped, with a prime example being our continued investment in the Philippines based global port operator International Container Terminal Services Inc (ICTSI). Despite the volatile external environment, ICTSI has demonstrated exceptional resilience, and in fact been a beneficiary of these dynamics, due to its diversified portfolio of emerging market terminals internationally, and its focus on origin and destination volumes – characteristics that make it a structural play on global trade fragmentation.
How often do you typically make portfolio changes? What changes have you made this year?
We continually review the portfolio to ensure that we have the investments that will generate the best long-term absolute return for our shareholders. Typically we will trade around 20-25% of the portfolio value per annum. This year, the material movements have come from a reduction in our global trade exposure, not due to the noise surrounding US tariffs, but rather due to the privatisation of two port assets – Santos Brazil and Wilson Sons, which were bid for and we sold out of. Further, there has been an increase in energy growth and transition assets, with NHPC, the Indian listed hydro generation company, entering the top 20 and an increase in exposure to Brazilian energy assets on the back of an improving energy pricing environment.
We often hear a weaker dollar is generally good for emerging markets – is that the case for infrastructure as well?
A weaker US dollar is generally supportive for EM, and this dynamic can be more pronounced for EM-listed infrastructure. Dollar weakness typically reflects expectations of lower US interest rates, which in turn helps emerging market economies, as it gives emerging market central banks more wiggle room to reduce their interest rates, without devaluing their currency. Reduced interest rates therefore make the local cost of borrowing lower, enhancing infrastructure companies’ bottom lines.
Infrastructure assets are also inherently long-duration and cash-generative, characteristics that allow them to employ leverage and make them more sensitive to interest rate movements. Lower rates are therefore a supportive tailwind for listed infrastructure.
Infrastructure companies also typically have high capex spend – often they rely on dollar-priced imported equipment. A weaker dollar makes imported materials cheaper, which again enhances the bottom line.
Nevertheless, it should be acknowledged that dollar weakness can sometimes signal economic fragility in the US, potentially weighing on global risk sentiment. However, EM infrastructure’s asset-backed, relatively non-cyclical, income-orientated nature provides resilience in this scenario.
See also: Square Mile: Funds to watch in the emerging markets sector
If you weren’t a fund manager, what job would you do?
I have a very analytical mind, so I have always been drawn to opportunities where I am challenged to understand things. I suspect therefore probably something very similar in the finance world.
What was the proudest moment of your career?
Rather than one particular moment, for me it has been seeing the evolution of UEM over the past 15 years – the growth of the portfolio, the relationships we have built in emerging markets, and the strength of the team that supports the strategy. Contributing to a disciplined, long-term investment approach and watching it grow over time has been so rewarding.
What was the most difficult moment of your career and why?
Apart from carrying my cardboard box out of Lehman Brothers in September 2008….all periods of severe market dislocation are always challenging. Not only from an investment perspective but also because of the uncertainty they create for companies and the teams involved. Navigating those moments requires discipline, and the difficulty often lies in balancing immediate pressures with long-term conviction.
What advice would you give to your 20-year-old self?
My motto in life has always been to “work hard and play hard”. Life is too short – live life to the max and enjoy what you do.
This article first appeared in our sister publication, Portfolio Adviser.
