Opportunities in tech include e-commerce and related logistics. A recent buy was the Warehouse Real Estate Investment Trust IPO on Aim last September, a trust that capitalises on demand for warehouse space by investing in UK retail warehouses.
The Aberdeen Standard European Logistics Income IPO in December is another recent pick. It buys specialists in last-mile delivery, urban and logistic warehouses in continental Europe.
These decisions were made on quantitative analysis and fund manager interviews. Summers says: “Buying at IPO is a good discipline, and the hardest part of my job. There are no three- or five-year numbers, so we do the qualitative analysis, and look at the investment philosophy and whether there is the discipline to execute it.”
Absolute skill
Absolute return vehicles are another area of interest for Summers, in part because they are less dependent on the direction of underlying markets than traditional vehicles; these funds are of most interest at the end of a cycle.
However, Summers is relatively indifferent to what assets might be used to generate steady returns as there is limited market exposure. Rather he looks for teams that can exploit market inefficiencies without taking market or macroeconomic risk. We are not looking for 10% growth, rather mid-single digits.”
Although absolute return funds aim to produce uncorrelated returns regardless of market movements, there are some problems with the asset class, according to Summers.
He says: “It has been easy to make absolute returns by just taking market risk, since bonds and equities have gone up. But will the funds go up in value when markets go down? Real skill is difficult to ascertain in a growing market.”
The 60 million-dollar question
Andrew Summers’ job is to work out whether a fund delivering good returns is the result of a manager’s skill. He also needs to be able to see a fund’s potential at IPO stage, via an accurate assessment of a fund manager’s capability. But what does this entail?
As Summers explains: “There is no silver bullet. Fund managers need to be intelligent, experienced and knowledgeable. These are all necessary but not sufficient conditions for outperformance.
“As such, we have to do the hard graft. We meet all 350 managers regularly, look at the communications they release, their positions and the work they are doing behind the scenes. All of this helps us to build a picture of their investment offering.
“People ask why I meet managers such as Nick Train of Finsbury Growth & Income, who only buys a stock every three years. But every time we meet, a new piece of the puzzle materialises. My picture, what I like and don’t like, becomes increasingly detailed every time.
“Academics have tried to do the same for organisations, to discover the traits that nurture outperforming managers. They have found that businesses with a more boutique feel, a clear philosophy, strong culture and a lot of skin in the game, meaning managers are well incentivised to hang around, tend to perform better.”
Jury still out on Trump
Regarding Donald Trump, Summers says he still isn’t sure whether the US president is a force for good or bad for investors. Deregulation, such as his repeal of net neutrality, and the ban on mandatory-arbitration clauses used by banks, makes him seem pro-business, as do the tax reforms being pushed through Congress – and both factors seem to have given US assets a long-term boost.
But Summers says there is a counter argument: “He is a very unconventional president, which means the risk of policy error or an unforced event spooking markets is high. There is also the possibility that the tax breaks, which will act as a stimulus, are ill-timed. Central banks are trying to slow things down. Although we may be some way off worrying about inflation from an investment perspective, we believe that people underestimate inflation levels in the US.”
The Corbyn threat
There is uncertainty closer to home, too. With ongoing criticism of the Brexit negotiations and prime minister Theresa May’s government more generally, the prospect of a Corbyn-led government is still looming.
Does shadow chancellor John McDonnell’s promise to bring PFI initiatives in-house bother Summers? “Yes and no,” he says. “For the first time in my investing career there is the prospect of a government that could seriously impact or question our investing framework.”
But he adds it is not clear there is the capacity or the will to make drastic changes. “The Labour Party’s policy on this is contradictory and they seem to be wavering on their commitment. Bringing everything in-house would be difficult and time-consuming. Does the government really want to paint, hire cleaners for, or mend roofs of 1,000 GP surgeries? Not to mention the schools, hospitals, court rooms and army barracks that would need to be managed.”
Summers also believes renegotiation of pre-existing contracts would be very difficult.
On the whole, he argues that a Labour government probably wouldn’t change the investment framework significantly. He is, therefore, unlikely to change his mind on the benefits of closed-ended funds.
He also argues that the development of PFI combined with disruptive technologies and lack of bank credit will throw up new opportunities that we can’t even conceive of yet.
He says: “Many of the current PFI projects would have been unthinkable 10 or 20 years ago. Who knows what the next decade will bring.”
