Utilico Emerging Markets Trust : Report and Accounts for the year to 31 March 2022 - PDF

2022

REPORT AND ACCOUNTS

EMERGING CITIES | EMERGING WEALTH | EMERGING OPPORTUNITIES

WHY UTILICO EMERGING MARKETS TRUST PLC?

Santos Brasil Participacoes S.A. (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, and the shift to digital economy, deliver attractive investment opportunities for UEM. The EM middle class is expected to double in ten years, driving 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 resilient 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 2022

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CONTENTS

PERFORMANCE

1. Current Year Performance
2. Performance Summary

• Chairman's Statement

1. Geographical Investment Exposure
2. Top Thirty Companies

1. Performance Since Inception (20 July 2005)
2. Ten Year Performance
   STRATEGIC REPORT AND INVESTMENTS
3. Investment Managers' Report

1. Macro Trends Affecting Our Portfolio

1. Our Investment Approach

1. ESG Spotlight
2. Largest Holdings Overview

1. Strategic Report

1. Investment Managers and Team

	GOVERNANCE
44	Directors
46	Directors' Report

1. Corporate Governance Statement

1. Directors' Remuneration Report

1. Audit & Risk Committee Report

1. Directors' Statement of Responsibilities

FINANCIAL STATEMENTS

1. Independent Auditor's Report

1. Accounts

1. Notes to the Accounts

ADDITIONAL INFORMATION

1. Notice of Annual General Meeting

1. Company Information
2. Alternative Performance Measures

1. Historical Performance

Rumo S.A. (Brazil)

FINANCIAL CALENDAR

Year End

31 March

Annual General Meeting

20 September 2022

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 - Alupar Investimento S.A. (Brazil)

FINANCIAL HIGHLIGHTS

International Container Terminal Services, Inc. (The Philippines)

NET ASSET VALUE	NAV OF 254.22P	REVENUE EARNINGS	DIVIDENDS OF 8.00P
("NAV") TOTAL RETURN	PER SHARE*	PER SHARE OF	PER SHARE
PER SHARE*

14.9%	11.2%	8.17p	2.9%
(2021: 30.2%)	(2021: 25.7%)	(2021: 8.13p)	(2021: 2.6%)

* See Alternative Performance Measures on pages 99 and 100

UEM turned in a strong performance, delivering a NAV total return of 14.9% for the year to

31 March 2022.

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Utilico Emerging Markets Trust plc

Report and Accounts for the year to 31 March 2022

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CURRENT YEAR PERFORMANCE

NAV TOTAL RETURN	SHARE PRICE	NAV OF 254.22P	SHARE PRICE
PER SHARE*	TOTAL RETURN	PER SHARE*	OF 224.00P
	PER SHARE*

14.9%	17.6%	11.2%	13.4%
(2021: 30.2%)	(2021: 27.3%)	(2021: 25.7%)	(2021: 22.3%)

DIVIDENDS OF 8.00P	INVESTED	REALISED	DIVIDENDS PAID
PER SHARE

• 2.9% £124.5m £176.9m £17.5m

(2021: 2.6%)

(2021: £174.7m)

(2021: £142.1m)

(2021: £17.2m)

6.5M SHARES	TOTAL REVENUE	ONGOING CHARGES*	NET DEBT REDUCED TO
BOUGHT BACK	RETURN INCOME

£13.9m	£22.6m	1.4%	£23.2m
(2021: £12.1m)	(2021: £22.8m)	(2021: 1.1%)	(2021: £53.6m)

* See Alternative Performance Measures on pages 99 and 100

TOTAL RETURN COMPARATIVE PERFORMANCE (1)

from 31 March 2021 to 31 March 2022

120

115

110

105

100

95

90

Mar 21

Apr 21

May 21

Jun 21

Jul 21

Aug 21

Sep 21

Oct 21

Nov 21

Dec 21

Jan 22

Feb 22

Mar 22

NAV total return per share

MSCI EM total return Index (GBP adjusted)

(1) Rebased to 100 as at 31 March 2021

Source: ICM and Bloomberg

4 Utilico Emerging Markets Trust plc

PERFORMANCE SUMMARY

	31 March	31 March	% change
	2022	2021	2022/21
NAV total return per share(1) (annual) (%)	14.9	30.2	n/a
Share price total return per share(1) (annual) (%)	17.6	27.3	n/a
Annual compound NAV total return(1) (since inception - 20 July 2005) (%)	9.7	9.4	n/a
NAV per share(1) (pence)	254.22	228.54	11.2
Share price (pence)	224.00	197.50	13.4
Discount(1) (%)	(11.9)	(13.6)	n/a
Earnings per share (basic)
- Capital (pence)	24.49	45.73	(46.4)
- Revenue (pence)	8.17	8.13	0.5
Total (pence)	32.66	53.86	(39.4)
Dividends per share
- 1st quarter (pence)	2.000	1.925	3.9
- 2nd quarter (pence)	2.000	1.925	3.9
- 3rd quarter (pence)	2.000	1.925	3.9
- 4th quarter (pence)	2.000(2)	2.000	0.0
Total (pence)	8.000	7.775	2.9
Gross assets(3) (£m)	569.6	556.1	2.4
Equity holders' funds (£m)	545.9	505.7	7.9
Shares bought back (£m)	13.9	12.1	14.9
Net cash/(overdraft) (£m)	0.5	(3.2)	115.6
Bank loans (£m)	(23.7)	(50.4)	(53.0)
Net debt (£m)	(23.2)	(53.6)	(56.7)
Gearing(1) (%)	(4.3)	(10.6)	n/a
Management and administration fees and other expenses
- excluding performance fee (£m)	7.3	5.0	46.0
- including performance fee (£m)	7.3	10.1	(27.7)
Ongoing charges figure(1)
- excluding performance fee (%)	1.4	1.1(4)	n/a
- including performance fee (%)	1.4	2.1(4)	n/a

1. See Alternative Performance Measures on pages 99 and 100
2. The fourth quarterly dividend has not been included as a liability in the accounts
3. Gross assets less liabilities excluding loans
4. 1.4% with effect from 1 April 2021 following changes to the Investment Management Agreement and the performance fee was discontinued (see page 77)

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.

Report and Accounts for the year to 31 March 2022

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JOHN RENNOCKS Chairman

CHAIRMAN'S STATEMENT

The year to 31 March 2022 has again been truly challenging. The war in Ukraine has taken us by surprise. While we understood the geopolitical tensions in

the region, we considered it unlikely that Russia would invade Ukraine to the extent that they did. It has been devastating

to watch a brutal war erupt in Europe. The response from the West has been firm and quick.

But given Ukraine's role in the world's soft commodities and Russia's central role in energy supplies, to Europe in particular, the global economic challenges have escalated dramatically.

Pleasingly, UEM turned in a strong performance and importantly delivered a NAV total return of 14.9% for the year to 31 March 2022, to end the year at an all-time

2022, UEM's NAV and share price total return are both ahead of the MSCI EM total return index since inception in 2005.

RUSSIAN INVESTMENTS

UEM has found investing in Russia challenging over the years due to the weak governance and endemic corruption, and has generally avoided investing there. At the start of the war UEM had exposure to one London listed company operating extensively in Russia, the rail freight operator Globaltrans Investment plc ("Globaltrans"). UEM's holding in Globaltrans was worth £4.3m (0.8% of the portfolio) as at 31 January 2022. Immediately following the invasion, UEM sold around two-thirds of its holding realising £1.5m in proceeds. Globaltrans was not sanctioned. ICM has a strong compliance and risk framework and will continue to ensure UEM complies with any new sanctions as they emerge. Globaltrans' shares were suspended and the residual holding is carried at nil value. UEM has no other

INDICES MOVEMENTS

from 31 March 2021 to 31 March 2022

130
120
110
100
90
80
70
60
Mar	Jun	Sep	Dec	Mar
2021	2021	2021	2021	2022
	NIFTY 50 Index	Hang Seng Index	Shanghai SE Composite Index
	PSEi - Philippine SE Index	Brazil Ibovespa Index
Rebased to 100 as at 31 March 2021			Source: Bloomberg

high of 254.22p. This was ahead of the MSCI EM total return Index which was down 6.9% over the same period. UEM measures its performance on a total return basis and long-term annual compound NAV total return since inception to 31 March 2022 was 9.7%. The Investment Managers are seeking long-term performance to be above 10.0% including a rising dividend, and during the initial period of Covid-19 UEM did lag behind the MSCI EM Index as investors focused on high growth technology companies. Since the approval of the vaccine, the world has moved steadily towards "living with Covid" and UEM's portfolio has regained value as a result. As at 31 March

direct investments in Russia, Belarus or Ukraine.

GLOBAL ECONOMY

There are numerous headwinds currently faced by the markets, each of which is challenging in its own right. These include sharply rising inflation; increasing interest rates; cyber security; shortage of commodities, especially wheat from Ukraine; Covid-19 disruption to supply chains; the Ukraine war; shift to green energy; US and China trade friction; zero-Covid policy in China; and leveraged economies. We have discussed a number of these before

and they largely remain unresolved. We are witnessing a significant rise in nationalism and wealth inequality. This combination of issues and challenges will no doubt tear at the fabric of our societies and institutions.

The Russian war in Ukraine is devastating on a number of levels. The brutality of the Russian army will be a scar on liberal societies for decades to come. The need to have resilient supply chains, energy security, green energy and increased defence capabilities will see resources diverted and reinvested with an urgency and scale not experienced in our lifetime. This will give rise to new opportunities for investors, including UEM. The war has resulted in sharply rising commodity prices and accelerating inflation. The scarcity of some soft

markets. Brazil and India have both emerged from Covid restrictions and performed strongly, while China has been unable to safely open up its economy. In the year to 31 March 2022, EM markets have seen the India Nifty 50 up by 18.9%, the Philippine PSEi up 11.8% and Brazil's Bovespa up 2.9%, while the Hang Seng Index was down 22.5%. Currencies have been mixed too, with the Brazilian Real up 24.4% against Sterling, the Hong Kong Dollar up 4.0% and the Indian Rupee up 1.1%.

Commodities have moved higher during the period under review, with oil up by 69.8%, wheat up by 62.8%, copper up by 18.9% and soybean up by 12.6%. Much of this is due to two factors: first, excess demand over supply following years of under investment in resources

MSCI EM SECTOR INDEX TOTAL RETURNS (GBP ADJUSTED)

from 31 March 2021 to 31 March 2022

commodities might well be the biggest social challenge, as food shortages emerge in a number of countries that rely on food imports from Ukraine.

and the bounce in demand for goods as economies opened up; and second, the elimination of supply arising from the Ukraine war. We expect these conditions to

16.3%	15.7%	14.9%
		8.6%	7.9%

(2.1)%

Financials	Utilities	UEM NAV	Materials	Industrials Information
		total return		technology
		per share

(2.1)%	(5.4)%
		(19.8)%
			(23.9)%	(24.1)%
Energy	Consumer Communication	Real	Healthcare
	staples	services	estate

Source: Bloomberg

Our Investment Managers deserve a note of thanks. Their approach to seeking out compelling opportunities in difficult markets has stood them in good stead over the years. A key aspect of their investment approach is to seek out strong management teams who can deliver resilient business performance. They have navigated the challenges to date very well.

EMERGING MARKETS

During the year, the progress in EM has been correlated to the development of Covid-19 in the individual

endure in the short term.

UNLISTED INVESTMENTS (LEVEL 3 INVESTMENTS)

UEM has over the years invested in unlisted businesses at a modest level. This remains true today. The largest investment was in CGN Capital Partners Infra Fund 3, a Chinese wind and solar farm developer and operator in mainland China. At year end this investment was carried at £13.0m representing 1.9% of UEM's portfolio. The underlying fund investments were agreed to be sold prior to UEM's year end at a pleasing profit and the

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Utilico Emerging Markets Trust plc

Report and Accounts for the year to 31 March 2022

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