2021
REPORT AND ACCOUNTS
EMERGING CITIES | EMERGING WEALTH | EMERGING OPPORTUNITIES | WHY UTILICO EMERGING MARKETS TRUST PLC? |
Ocean Wilsons Holdings Limited (Brazil)
Utilico Emerging Markets Trust plc's ("UEM" or the "Company") investment objective is to provide long-term total return through a flexible investment policy that permits UEM to make
UEM is an emerging markets specialist fund focused on long-term total return predominantly in infrastructure and utility investments.
investments predominantly in infrastructure, utility and related sectors, mainly in emerging markets.
TRUSTED | DIVERSIFIED | PROVEN |
A closed end fund | A diverse portfolio of | Strong management team |
focused on long-term | operational cash | with a long-term record |
total return | generative investments | of outperformance |
OPPORTUNITY
UEM offers a diverse portfolio of high conviction, bottom- up investments spread across jurisdictions and sectors. The Company seeks to invest in companies most of which pay dividends, thereby contributing to UEM's performance.
EMERGING MARKETS
Emerging markets ("EM") offer higher Gross Domestic Product ("GDP") growth, and coupled with the urbanisation and expansion of the middle class, deliver attractive investment opportunities for UEM. The EM middle class sector is expected to double in ten years, which will drive the need for investment in infrastructure and utilities.
HIGH OPERATING LEVERAGE
UEM's portfolio is predominantly operational. Infrastructure and utility assets are enablers of growth in EM and usually offer high operating leverage.
UTILITIES AND INFRASTRUCTURE ASSETS
At a time of heightened uncertainty, these are often long-term assets with established regulatory frameworks which should continue to deliver predictable and sustainable income streams, thereby helping to underpin UEM's quarterly dividend payments.
Report and Accounts for the year to 31 March 2021 | 1 |
CONTENTS
PERFORMANCE
- Chairman's Statement
- Current Year Performance
- Performance Summary
- Geographical Investment Exposure
- Top Ten Companies
- Performance Since Inception (20 July 2005)
-
Ten Year Performance
STRATEGIC REPORT AND INVESTMENTS - Investment Managers' Report
- Macro Trends Affecting Our Portfolio
- Our Investment Approach
- Thirty Largest Holdings
- Ten Largest Holdings Review
- Data Services and Digital Infrastructure
- Strategic Report
- Investment Managers and Team
GOVERNANCE
- Directors
- Directors' Report
- Corporate Governance Statement
- Directors' Remuneration Report
- Audit & Risk Committee Report
- Directors' Statement of Responsibilities
FINANCIAL STATEMENTS
- Independent Auditor's Report
- Accounts
- Notes to the Accounts
ADDITIONAL INFORMATION
India Grid Trust (India)
FINANCIAL CALENDAR
Year End
31 March
Annual General Meeting
21 September 2021
Half Year
30 September
Dividends Payable
March, June, September
and December
The business of the Company consists of investing the pooled funds of its shareholders in accordance with its investment objective and policy, with the aim of spreading investment risk and generating a return for shareholders. The joint portfolio managers of the Company are ICM Investment Management Limited ("ICMIM") and ICM Limited ("ICM"), together referred to as the "Investment Managers".
Front cover image - Rumo S.A. (Brazil)
FINANCIAL HIGHLIGHTS
International Container Terminal Services, Inc (The Philippines)
NET ASSET VALUE | NAV OF 228.54p | REVENUE EARNINGS | DIVIDENDS |
("NAV") TOTAL RETURN | PER SHARE* | PER SHARE OF | PER SHARE |
PER SHARE* |
30.2% | 25.7% | 8.13p | 2.6% | |||
(2020: | 24.9%) | (2020: | 27.2%) | (2020: 7.88p) | (2020: | 5.2%) |
- Notice of Annual General Meeting
- Company Information
- Alternative Performance Measures
- Historical Performance
On 3 April 2018, as a result of the proposals to redomicile Utilico Emerging Markets Limited ("UEM Bermuda") to the United Kingdom, the shareholders of UEM Bermuda exchanged all their shares in UEM Bermuda for shares in UEM on a one for one basis and UEM Bermuda became a wholly owned subsidiary of UEM. All performance data relating to periods prior to 3 April 2018 are in respect of UEM Bermuda.
2 Utilico Emerging Markets Trust plc
* See Alternative Performance Measures on pages 96 and 97
Report and Accounts for the year to 31 March 2021 | 3 |
CHAIRMAN'S STATEMENT
The year to 31 March 2021 has continued to be truly challenging. Everybody has been impacted, with governments having to deal with unknown outcomes, business owners and investors seeking confidence and growth, and employees looking for job security, certainty and balance to their lives. We now have a better understanding on how to mitigate Covid-19 surges and
that vaccines work. On the back of this rising confidence, equity share markets have recovered strongly.
Pleasingly, UEM turned in a strong performance and importantly delivered a NAV total return of 30.2% for the year to 31 March 2021, albeit from a low NAV of 178.14p on 1 April 2020. UEM measures its performance on a total absolute return objective and long-term annual compound NAV total return since inception is now 9.4%, although the Investment Managers are seeking long-term performance to be above 10.0% and this includes a rising dividend.
UEM has lagged behind the MSCI EM Index as investors globally have focused on technology companies, driving digital growth investments higher. The MSCI EM Information Technology sector Index has outperformed the rest of the markets, rising by 83.2% during the year to 31 March 2021. By its nature, UEM's portfolio is predominantly invested in utilities and infrastructure
assets which have been out of favour with investors throughout most of the year. The MSCI EM Utilities sector Index was only up by 17.2% during the twelve months to 31 March 2021 compared with UEM's outperformance of 30.2% which is a significant positive.
Covid-19 continues to be a global pandemic that has impacted every continent and every community, and this cannot be over emphasised. It has exposed the stresses and weaknesses in our economies, politics and social fabric; from disrupted health services, education, business and social activities. Governments have struggled to keep up with a rapidly changing situation and deciding on the optimal medical, economic and social solutions to tackle the pandemic. The vulnerable have borne and continue to bear the greatest burden directly and indirectly from Covid-19.
The pandemic has seen both an immediate demand and supply shock which has impacted most stakeholders in all economies. As we move through the policy responses, we are seeing ongoing "aftershocks", especially in supply chains. We expect this to continue. Economic and stock market volatility is expected to remain high.
The policy response has been to seek to break community transmission of Covid-19, ranging from lockdowns, to testing, through to vaccination programmes. Economically there have been two parts to the Covid-19 response: central banks have dramatically increased the supply of capital while reducing the cost of capital; and governments have introduced significant support schemes for businesses especially around
INDICES MOVEMENTS
from March 2020 to March 2021
180
170 160 150 140 130
120 110 100
90
Mar | Jun | Sep | Dec | Mar | ||||
2020 | 2020 | 2020 | 2020 | 2021 | ||||
Brazil Ibovespa Index | NIFTY 50 Index | Hang Seng Index | ||||||
Shanghai SE Composite Index | PSEi - Philippine SE Index | |||||||
Rebased to 100 as at 31 March 2020 | Source: Bloomberg |
continued employment and social welfare support. These are truly unprecedented steps which have come at a very high economic cost.
At the same time there is also an accelerating expectation that businesses address questions around their approach to Environmental, Social and Governance ("ESG") outcomes. The concept of responsible investing has always been a core component to UEM's investment process. UEM's Investment Managers have a good record on governance, given their active approach to investee companies and they have taken steps to continue to strengthen their ESG approach to investing. ICM has recently become a signatory to the United Nations - supported Principles for Responsible Investment ("PRI"),
Over the year, the individual markets have seen strong divergences in market indices and currencies as country-by-country responses have varied, and the impact of Covid-19 has differed in its timing and its severity. A common theme within markets has been the acceleration of disruptive or enabling digital businesses, which have thrived with the shift to working from home. We expect this trend to continue and even accelerate further. There are significant technology disruption opportunities from finance to health and from businesses through to government.
Numerous and substantial social issues are still evident, including nationalism, climate change and wealth inequality. However, communities have pulled together, and the human spirit has risen above this upheaval. We hope the global leaders are up to these challenges.
The EM markets have broadly been stronger with the India Nifty 50 up 70.9%, Brazil Bovespa up 59.7%, Shanghai Composite up 25.1%, the Philippine PSEi up 21.1% and Hang Seng up 20.2%. The dampener has been currency headwinds with the Brazilian Real down 17.4% against Sterling, while the Hong Kong Dollar was down 10.4% and the Philippine Peso was down 5.4%. Much of the currency weakness has been accelerated by the impact of Covid-19, and the respective country impacts and responses. Nearly all central banks reduced interest rates in order to soften the economic impact and increase resilience in their individual economies. Brazil reduced the benchmark interest rate (Selic) from 3.75% as at 31 March 2020 to 2.75% as at 31 March 2021, while the Indian interest rate reduced by 2.0% in the year to 31 March 2021. Over the year to 31 March 2021, EM currency weakness reduced UEM's GBP NAV by an
MSCI EM SECTOR INDEX TOTAL RETURNS (GBP ADJUSTED)
from 31 March 2020 to 31 March 2021
83.2% | 76.5% | |||||||
45.1% | 43.2% | 34.7% | ||||||
33.7% | 30.2% | |||||||
29.9% | ||||||||
23.5% | 20.5% | 17.2% | ||||||
8.0% |
Information Materials | Consumer Healthcare | Industrials Communication UEM NAV | Energy | Financials Consumer Utilities Real estate |
technology | discretionary | services total return | staples | |
per share | Source: Bloomberg | |||
a code of best practice for incorporating ESG issues. UEM is therefore able to meet the expectations and requirements of that framework. ESG continues to be a focus for UEM, and we believe this offers significant opportunities for the Company over the long-term.
Today the world is largely over leveraged and under employed. The next significant policy steps we expect are under the broad policy banners of "build your way out of the pandemic" and the "green agenda". These will add to demand and we believe will see strong inflationary pressures continue to rise, especially where supply is disrupted. While the policy initiatives may well reduce unemployment, they will add significantly to the already unpreceded debt levels.
estimated 8.3%.
Commodities have moved significantly higher. Oil was caught up in the pandemic demand shock and the power struggle between oil suppliers. Oil famously traded on the Houston Exchange at negative values as oversupply combined with the shortage of storage resulted in surplus oil for immediate delivery. However, oil ended the year to 31 March 2021 up 179.4%. Expectations of a new super cycle in copper, driven by both the green agenda and a construction boom are driving copper prices to new highs. We expect this growth to continue although price volatility may continue.
The emerging risk from cyber attacks on businesses and governments is a deep concern to all. So far we have not
4 | Utilico Emerging Markets Trust plc | Report and Accounts for the year to 31 March 2021 | 5 |
CHAIRMAN'S STATEMENT (continued)
seen evidence of it within UEM's investee companies but the apparent escalation is a concern for all.
It is also worth noting that, as economies reopen, demand for goods and services is likely to accelerate above normal trend lines. Coupled with the cost savings implemented by many businesses in the face of huge economic uncertainties from the pandemic fallout, reported margins are actually widening. We expect this to continue for much of this year.
China remains key to the EM, given its size and growth. In the short-term we expect China's GDP to remain well above its recent long-term trend line, but its GDP may fall back sharply later this year as policy responses are curtailed. Brazil is benefiting from strong commodity demand and the ongoing privatisation process should continue to attract capital into the country. India is currently being ravaged by Covid-19. Until the impact is significantly lower, its economy will remain stalled.
REVENUE EARNINGS AND DIVIDEND
It is pleasing to report UEM's revenue earnings per share increased by 3.2%, given the challenges faced by investee businesses and their need to preserve cashflow, especially in the first six months to 30 September 2020. At the half-year, revenue income was at 81.3% of the prior year. This closed up to 94.9% in the full year as dividend income recovered strongly in the second half of the year.
CURRENCY MOVEMENTS vs STERLING
from March 2020 to March 2021
115
105
95
85
As at 31 March 2021 13.6% of UEM's portfolio was invested in the Data Services and Digital Infrastructure sector which is projected to be higher growth but typically pays lower dividends and as such the rest of the portfolio worked harder to deliver this earnings uplift.
UEM has now declared four quarterly dividends totalling 7.775p per share, a 2.6% improvement over the previous year. Dividends remain fully covered by income. The retained earnings revenue reserves increased by £1.0m to £6.9m (prior to the payment of the last quarter dividend). The fourth quarterly dividend of 2.00p per share represents an uplift of 3.9% on the prior quarterly dividend. The Board remains confident this quarterly rate will be maintained for the next financial year.
The Board would like to re-emphasise that UEM's portfolio is predominantly invested in relatively liquid, cash-generative companies which have long-duration assets that the Company's Investment Managers believe are structurally undervalued and offer excellent total returns.
SHARE BUYBACKS
UEM's share price discount widened over the year from 11.2% as at 31 March 2020 to 13.6% as at 31 March 2021. This continues to be above levels that the Board would wish to see over the medium term. The Company has continued buying back shares for cancellation and has stepped up its buybacks with 6.6m shares bought back in the year to 31 March 2021, at an average price of 182.81p, and total cost of £12.1m.
While the Board is keen to see the discount narrow, any share buyback remains an investment decision. Traditionally the Company has bought back shares if the discount widens in normal market conditions to over 10.0%. Since inception, UEM has bought back 56.0m ordinary shares totalling £97.8m. The buybacks now represent significantly more than the initial IPO capitalisation of UEM Bermuda when it came to market in July 2005.
in consultation with the Company's brokers, determined a fee of 1.0% of NAV (and reducing at higher levels of NAV) was fair to the Investment Managers and shareholders. This revised fee arrangement was implemented from 1 April 2021. As a result of the above, ongoing charges will be 1.4%, compared to 1.1% for the year to 31 March 2021. More details are set on page 97.
A performance fee in respect of the year to 31 March 2021 of £5.1m was earned and this was paid in cash and shares. To satisfy the share element the Investment Managers bought shares in the market which resulted in the fee being reduced by £0.3m to £4.8m as the shares were bought on market at a discount after the year-end.
BOARD
Garth Milne has indicated his intention to retire from the Board following the conclusion of UEM's forthcoming annual general meeting ("AGM"). Garth was a founding Director of UEM in 2005 and the Board and Investment Managers wish to thank him for his immense contribution over the years. His experience and level- headed approach will be missed. The Board has started the process of appointing a new independent director. The Board will continue to consider board refreshment in the coming year.
COVID-19 IMPACT ON UEM
The Covid-19 impact on UEM's portfolio is detailed in the Investment Managers' Report on page 15. However, it is worth noting that no UEM investee company has needed or is expected to require significant restructuring or refinancing. The strategic nature and business model strength of UEM's portfolio has been excellent. Although market valuations of some companies initially deteriorated sharply, most of the businesses have proved resilient. Coupled with strong government and central bank support the Board does not today see a significant risk from Covid-19 outside of market volatility in valuations.
Today the outlook is improving. Vaccinations are proving
China Everbright Greentech Limited (China)
DIVIDEND PER SHARE OF 7.775P, UP BY
2.6%
FOR THE YEAR TO 31 MARCH 2021
using video conferencing to meet the requirements by governments on social distancing and travel restrictions, whilst ensuring the Board receives regular updates on the Company's portfolio and operating performance from the Investment Managers. Nearly all interactions with UEM's service providers have been by video conference, including the audit process.
UEM CONTINUATION VOTE
UEM's forthcoming AGM in September contains a resolution proposing the continuation of the Company, as required by UEM's Articles of Association. The Board remains firmly of the view that it is in the shareholders'
75 | |||||||||
Mar | Jun | Sep | Dec | Mar | |||||
2020 | 2020 | 2020 | 2020 | 2021 | |||||
Brazilian Real | Romanian Leu | Indian Rupee | |||||||
Hong Kong Dollar | Philippine Peso | Source: Bloomberg | |||||||
Rebased to 100 as at 31 March 2020 |
MANAGEMENT AND PERFORMANCE FEES
Following a proposal from the Investment Managers to discontinue the performance fee and move to a flat fee, the Board asked UEM's brokers to determine if this was supported by our larger shareholders. There was strong consensus for the removal of the performance fee, especially from our wealth manager investors. The Board,
to be effective and the vaccination approval processes were quick. Most of the developed market economies are well on their way to "vaccine herd immunity". We expect there to be an acceleration in vaccination programmes over the coming six months in EM markets.
UEM, as a company, has adjusted to the global lockdowns and cancelled all travel by the Board. UEM moved to
interest for UEM to continue as currently constituted. The Investment Managers, together with UEM's brokers, have met many of UEM's major shareholders over the last month and ascertained their views on a number of topics. These have been reflected in UEM's forward thinking and processes and UEM thanks these shareholders for their input.
6 | Utilico Emerging Markets Trust plc | Report and Accounts for the year to 31 March 2021 | 7 |
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Utilico Emerging Markets Trust plc published this content on 18 June 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 18 June 2021 12:10:02 UTC.