James Mackreides highlights two specialist emerging-market investment trusts for investors seeking an alternative to mainstream funds, which are becoming increasingly dominated by technology stocks.
The MSCI Emerging Markets index is now heavily skewed toward technology. Taiwan Semiconductor, Samsung Electronics and SK Hynix alone represent almost 30% of it. Taiwan and South Korea together account for nearly half, Asia makes up 80%, and technology represents 44%.
Returns have been strong lately, largely because of tech stocks, which rose 90%, 238%, and 422%, respectively, over the past year. But investors buying into emerging markets are not getting the exposure they may think they are.
How to find domestic growth in emerging markets
Fortunately, some trusts provide broader diversification. Utilico Emerging Markets (LSE: UEM) focuses on infrastructure, utilities and related assets, with no exposure to the big technology companies. Its regional mix also differs sharply from the index: Brazil accounts for 22%, other Latin American markets 17%, and Eastern Europe, including Greece, 9.5%. China makes up only 9% of the portfolio - mostly through Hong Kong - compared with 20% in the index. "We find China very difficult, as regulations can change overnight," says co-manager Charles Jillings.
Orizon Valorizao de Resduos, a Brazilian waste management company, represents the largest holding. International Container Terminal Services ranks next; although based in the Philippines, it operates across 19 countries.
Other investments show the portfolio's geographic range. They include Korea Internet Neutral Exchange, which provides internet infrastructure, Grupo Aeroportuario del Pacfico, operator of airports along Mexico's Pacific coast, and Piraeus Port in Athens.
UEM is therefore far more exposed to domestic growth across emerging markets than the global technology-heavy index, while often trading at appealing valuations.
Jillings points to Sonatel, a major West African mobile operator. Customer spending is driving annual growth of 12%-13%, yet the shares trade at only 2.7 times cash flow.
Without enough technology exposure, UEM has trailed the MSCI Emerging Markets index over the past one and three years. Even so, it gained 14% and 34% over those periods, respectively. Since 1995, it has delivered an annual return of 9.5%, beating its benchmark. The shares trade at a 10% discount to net asset value (NAV) and yield 4.3%.
Consider smaller emerging-market companies
Mobius Investment Trust (LSE: MMIT) takes a less conventional route, focusing on dynamic small and mid-sized companies instead of the market's biggest names. Its 136 million portfolio contains only 25-30 stocks, with little overlap with the MSCI Emerging Markets index.
Taiwan and Korea still make up 38% of MMIT's portfolio, while technology accounts for 31%. Those positions have been trimmed in favour of industrial and financial stocks. China represents less than 3% - an underweight that contributed to 22% underperformance against the MSCI Emerging Markets Mid Cap index last year, but has helped produce 12% outperformance this year.
India's share has climbed to 28% this year. Foreign investors have been selling, but domestic buyers have kept purchasing, says lead manager Carlos von Hardenberg. The Nifty 50 is now 10% below its 2024 peak, despite economic growth holding at 7.5%-8%, inflation at just 4%, and interest rates at 5.25%. The rupee has fallen 10% over the past year, helping exporters and encouraging companies to replace imports.
Mid caps have trailed large caps, with returns of 33% over the past year and 44% over three years, both below the MSCI Emerging Markets index. Von Hardenberg expects them to catch up. He estimates that the portfolio can produce operating margins of 23% and annualised earnings growth above 45% over the next five years. The shares trade at a 10% discount to NAV and yield 1%.
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