The demand for alternative sources of income isn’t going away! Last week brought news that the well-respected management team at Utilico Emerging Markets is planning to bring out another closed-end fund this time looking to mix bonds and equities. I’ll review that IPO in a ‘mo but first a reminder that AltFi’s popular Alternative Income event is on next Tuesday in the City of London and that tickets are still available. It should be a packed morning with lots of listed funds in attendance and you can find out more about the event HERE.
Anyway back to the putative new fund called Utilico Global Income. In short the fund (proposed ticker UGI) aims “aims to provide long-term total returns to shareholders through rising regular dividend payments and capital growth. The investment policy is to invest in a range of financial instruments, comprising predominantly equities and fixed income securities, globally and across all sectors of the market. There will be an emphasis on the infrastructure and utility sectors in both developed and emerging markets. The target dividend yield is 5% per annum with dividends being paid quarterly. The total return target is 7.5% to 10%. “
Some fund basics:
- Fund structure Target fund size 100m (£50m minimum)
- UEM and ICMIM have undertaken to subscribe £10.0m and £0.25m respectively pursuant to the Initial Placing. Assuming that the minimum Gross Proceeds of £50 million are raised
- Starting NAV (estimated) 98p minimum
- Fund structure/listing UK investment trust, Premium listing LSE Main Market
- Offer structure Initial Placing, Offer for Subscription and Intermediaries Offer (with subsequent 12 month Placing Programme)
- Management fees Annual management fee of 0.8% of net assets
- Life Unlimited, with 5-year continuation vote Fully invested Approximately 3 months from initial admission Leverage
- Leverage up to 20% is permissible through bank debt
- Initial Admission occurring by 8.00 a.m. on 22 June 2018 (or such later date, not being later than 30 July 2018
We already know plenty about the existing developing markets fund – Utilico Emerging Markets – but the new addition seems to be the bolt on of the bonds exposure. This multi-asset combo is unusual although I think State Street does have an SPDR infrastructure ETF which invests in both infra bonds AND equities. I’m also guessing that ETF has a much lower TER when compared to the Utilico fund although their mandates and investment strategy are very different.
Regardless of that, the key new factor to consider is the joint bond manager, who’s previously run the unlisted Pentagon Global Diversified fund which invests in debt securities, including bonds and asset back securities. The average credit quality of the bonds in this long-established portfolio is BBB, with the fund showing a 0.68 correlation to HY Corporates. In terms of returns since inception, we’ve seen an annualized return of 7.73% while in the last three years that’s dropped to around 6% per annum.
Back with the Global Fund, the joint managers intend to elect companies for the Company’s portfolio on the basis of fundamental or “bottom-up” analysis.
- Infrastructure & Utilities: Over the last two decades, the Joint Portfolio Managers’ team has managed a number of successful investments in the infrastructure and utility sectors, in both developed and emerging markets, including UEM today. There continues to be a range of investable opportunities which are available to the investment analysts but which are not made since the current investment mandates of the Joint Portfolio Managers target higher returns. These investable opportunities offer a good risk-adjusted return and would underpin the returns sought by the Company. The nature of infrastructure and utility companies is that they usually have a degree of pricing power, are regulated, have the predictability of earnings, are asset based in nature and which, together with good management, offer protection to investors. (b) Corporate Bonds: The ICM corporate bonds investment analysts identify a number of corporate bonds, some of which do not fit within their existing mandates. Again, these offer attractive risk-adjusted returns. A strength of the corporate bond investment analysts’ approach is a sharp focus on risk. This is expected to benefit the Company as it seeks to deliver above average returns with below average volatility.
- Corporate Bonds: The ICM corporate bonds investment analysts identify a number of corporate bonds, some of which do not fit within their existing mandates. Again, these offer attractive risk-adjusted returns. A strength of the corporate bond investment analysts’ approach is a sharp focus on risk. This is expected to benefit the Company as it seeks to deliver above average returns with below average volatility.
Probable portfolio split will look something like: Equities 60%, corporate bonds 40%, developing markets 60%, developed markets 40%, and a total portfolio of up to 90 holdings.
My take is generally positive with a few cautions. Utilico are good managers and their UEM vehicle has a great track record – I’m certainly a long-term investor. Its alternative Investment vehicle has a rather less inspiring track record but I’ll gloss over that. The bond fund also looks solid and I think there’s a real logic to combining both bonds and equities in one long-term portfolio. The 5% yield target also looks achievable. The nearest competitor will be, I guess, the reformulated Ecofin portfolio which has a stronger global equities theme to it but with a similar yield target.
My slight qualms are that as a UEM investor I’m not entirely enthused that I’ve become a forced shareholder in this new fund – given a choice I’d probably have supported it but the choice wasn’t offered. More importantly, I wonder about the fund’s timing of the IPO. I know that utilities and infra stocks (and bonds) could be a more defensive option if markets take fright. But I still can’t see lots of upside from here on in. Maybe I’m a little too cautious but it feels a bit late in the cycle for anew generalist equities and bonds fund. But I wish the fund well and I think there’s certainly a place in any long-term investors portfolio for a generalist infra and utility fund with both bonds and equities.
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