This article first appeared in Capital, The Edge Malaysia Weekly, on November 23 - 29, 2015.

LONDON-listed Utilico Emerging Market Ltd (UEM) has been investing in MyEG Services Bhd for over 10 years.The closed-end fund’s investment in MyEG has certainly paid off, judging by the ICT firm’s performance. Its share price has soared 27 times since it was listed on Bursa Malaysia in 2007.

According to Charles Jillings, who manages the daily operations and investment portfolio of UEM, MyEG and Malaysia Airports Holdings Bhd (MAHB) are among its top 10 holdings by gross asset percentage. MyEG is its top holding, commanding 6.9% of its total gross assets, while MAHB ranks third at 6.1%.

However, Jillings, who is also chief executive of ICM Investment Research Ltd and ICM Investment Management Ltd, has turned cautious on Malaysia.

In an interview with The Edge, the Briton says he is now neutral on Malaysia, from positive previously, because he thinks that the US dollar will continue to strengthen, which will further weaken commodity prices.

“So, I think that there are some challenges,” he says, adding quickly, “but we’re not invested in the economy, we’re invested in the assets.”

When asked if the unfavourable political conditions in Malaysia have affected his views of the country, Jillings says, “It is disappointing to see that. It certainly will distract investors because the world has moved to being concerned about these issues rightly.”

He adds that the authorities need to address the matters openly and with transparency to regain confidence.

That said, Jillings is not jittery about Malaysia as yet. The global fund manager is still constantly looking for investment opportunities. After all, it is valuations that matter in investing.

He believes that the emerging markets, including Malaysia, will continue to grow amid relatively low inflation and an urbanising population.

“The challenge is whether the right policies are chosen and whether they are effectively executed. There are lots of choices to be made, whether the right ones are made and followed through,” Jillings comments.

Most emerging market currencies have been on a losing streak against the US dollar this year, as the US economic recovery gains strength. This has made investing in emerging markets difficult. The depreciating currencies have pulled investments in emerging markets into negative territory.

Jillings says currencies have been the main challenge for UEM in the last two to three years. “Currencies are a real headwind. When currencies weaken, the returns on your investments — which may be performing, growing and creating value in the respective local currencies — will be undermined [by the foreign exchange difference].” 

Jillings says UEM’s fund has seen negative returns over the last 12 months, owing to the weakening currencies in the emerging markets. However, looking over a 10-year horizon, he says, the fund is compounding at a rate close to 11%. “Once currencies reach stability and markets reach a pricing point, I expect our fundamental growth to show in terms of performance. Therefore, we will see an upside.”

The currencies of emerging markets in Asia have not only depreciated against the greenback but also against other developed economies’ currencies, such as the British pound. The ringgit stuck out like a sore thumb, depreciating a total of 30% against the greenback and 27.15% against the pound over the last year.

Nevertheless, Jillings believes the trend will reverse and Asian currencies will regain their strength as their respective countries still remain on the growth path and are implementing the reforms that they have committed to.

“The further the currencies weaken, the more they will represent in themselves an attractive investment point sooner or later. But from my point of view, the fundamental issue is the direction of the government and its consistency. If you can get confident in that, you can make the long-term investment and hold it,” he says.

His view is unsurprising, given that UEM invests primarily in utilities, transport, infrastructure and communications, sectors that are often tightly regulated by the government.

“We tend to be long-term investors, looking out over a five-plus-year horizon. The assets that we’re invested in are subject to policy changes and changes in relationships. Our biggest focus is on how we can be confident about the somewhat mid-term outlook as opposed to the next month or next year.

“So, we’re constantly visiting all the emerging markets in which we invest, to keep abreast of current challenges both economically and individually for the companies that we’re invested in,” he says.

Jillings opines that Asia’s economies, including China, offer more growth. He adds that UEM focuses on urbanisation and growth of the middle-income group, meaning that there is a higher level of that dynamic found in Asia. “If you look at most conurbations in Asia, there’s a degree of urbanisation and a degree of growth in the middle class. That’s driving the need for airport capacity, toll roads and mobile usage in terms of communications. It’s driving house building and this benefits water and gas distribution. There is where our portfolio is focused,” he explains.

He adds that he does not have a need to be invested in either a particular industry or a country. What he is looking for instead is a spread of assets across emerging market countries and a spread in asset classes.

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