In this short teaser video, Alex Paget, co-manager of the VT Downing Fox Funds, explains the philosophy and investment process behind the Downing Fox multi-asset funds. Continue reading below to learn more about the components that make up the range of funds, the key differentiators, and what to expect from their performance.

1. The VT Downing Fox Funds range

The VT Downing Fox Funds range is designed for clients of UK advisers.

Our aim is for these funds to deliver attractive returns while behaving in the way you’d expect. If we do this, your clients will be satisfied, and your business will be easier to run.

The range consists of four funds of funds. They differ by the amount they hold in equities: 40%, 60%, 80% and 100%. These levels are fixed.

Otherwise the funds are the same: they have identical holdings, just in different proportions. So, by using one of our funds, or combining two, you can hit the right biting point between risk and reward for any client, at all the points on their investment path.

2. The Two Components: Growth & Defence

Each of the VT Downing Fox Funds consists of a defined blend of two components: “Growth” and “Defence”.

Each component’s job is clear: the Growth component should generate attractive returns over the long run, capturing the gains made when stock markets rise.

The Defence component should stand firm when equity markets are falling, reducing the impact of volatility and making tough conditions easier to bear for risk-averse investors.

When managing the funds, we deliberately separate these components. If we don’t (and many don’t), it’s too tempting to replace defence with attack when the going’s good, leaving your whole portfolio vulnerable when the going turns bad.

3. The Growth Component

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The Growth Component of each VT Downing Fox Fund is there to make long-term returns.

We believe equities are the best asset class for doing this, so that’s all this component holds.

We also believe that dedicated, experienced investors can pick the wheat from the chaff in any equity market. So we use them (or more accurately their funds) to pick individual shares for us. We expect this to give us more exposure to great investments, and less exposure to poor ones.

As such, we spend much of our time looking for the best fund managers, then monitoring them to make sure they stay the best.

We ask many questions in our search for the best, but perhaps the most important is; do you have “skin in the game”?

By that we mean: do you invest your own personal money in your fund, putting it alongside ours and our investors’ (we buy our funds too).

This alignment of interests is surprisingly powerful, particularly when it comes to avoiding recklessness.

We also want the Growth component to be well diversified, so we spread it across many countries, managers and investment styles. This is no all-eggs-in one-basket type of investment.

4. The Defence Component

As the managers, we’re happy to hold our Growth component by itself (it makes up all of the VT Downing Fox 100% Equity Fund). But our tolerance for volatility may be higher than most of your clients’.

That’s why, for the three other VT Downing Fox Funds, we dilute the equity exposure using our Defence component, as its job is to reduce volatility.

We keep this simple. The Defence component can only hold cash (or cash equivalents) and developed-market government bonds. These are assets that have proved capable of cushioning stock market falls in the past.

We actively monitor and tweak the mix of these assets to maintain a blend we believe will stand up to a period of upheaval.

Just as important is what we don’t hold. This, in a nutshell, is everything else, including the “alternatives” used by many other multi-asset portfolios as equity diluters. These, for the most part, have not been tested over generations of market cycles, wars and crises in the way that cash, bonds and equities have.

So, while they might turn out to be useful defenders, they may not (and often don’t). We prefer not to take the risk, so we stick to the tried and the tested.

Differentiator #1 - Fixed Allocations

The risk your clients can bear, and the financial growth they need, are personal to them. So it’s you who should alter this balance - not us.

Yet most multi-asset portfolios regularly change their asset allocation, thereby shifting the risk-reward balance. We believe this causes more problems than it solves.

For one, it’s often done badly; based on overconfident economic or political guesses, which can prove costly. For another, changes may interfere with your own planning, for example, raising risk for your client just as you were trying to reduce it. This is why we state a fixed level of equities in each of our fund’s names. Then we stick to it. Forever.

This gives them advantages as stand-alone investments, but it also allows our whole range to operate as a coherent whole, not a rag-tag bunch of loosely related offerings.

We maintain consistent holdings and approach across our whole range, which:

a) allows you to use our funds across all of your diverse client base;

b) means you can easily alter any client’s exposure to match their risk and return requirement (a biting point which is forever shifting).

Differentiator #2 - Charge for the whisky, not the water

The part of each Downing Fox fund that isn’t invested in equities has one job: To dilute the performance of the equities when their prices are falling.

Sometimes the best way to do this will be to hold cash. But most multi-asset funds or services cannot, or will not, hold cash, as it’s perceived as “not adding value” (which means they can’t justify charging you for it).

In contrast, we acknowledge that you don’t like paying management charges on cash, but sometimes cash is the safest asset to hold. We’ve solved this problem by cutting our management fee to reflect the amount held in the non-equity portion of each of our funds, which leaves us free to hold cash when we think it’s the best thing to do.

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“OCF” is the Ongoing Charges Figure. It relates to the costs of running the fund and is what you pay each year you hold it. Please see the Prospectus and KIID for full details.

Differentiator #3 - Hive mind vs the autocrats

Many multi-asset portfolios are run by managers who believe they can outsmart markets through their lofty top-down decisions, like a chess Grand Master.

Chess, however, is a game contained by clear rules, two players, 32 pieces and 64 squares. But investment markets are no game; they’re real-life. They consist of trillions of ever-changing variables, making them ill-suited to an autocratic, top-down approach.

This is why we call on many diverse managers and teams from across the world. They know more about their areas of expertise than we ever will, so we rely on them to gradually move their corner of your portfolio into the companies, industries, and markets where the balance between risk and reward is most compelling.

In a world that is deeply complex and changing quickly, we think this hive-mind approach is the most sensible way to protect and grow your clients’ wealth.

Differentiator #4 - Old elephants don’t run fast

Our experience suggests the best returns from an exceptional fund manager are more likely in the early part of their career than towards the end.

This might be because their fund becomes too popular, and therefore too big, so they can no longer buy the same types of companies. Or it may be because their passion for the job wanes.

However, many investment portfolios can’t, or won’t, buy anything other than large established funds. “Can’t”, because they themselves have too much money in their portfolios, so can’t squeeze into anything but an XXL. Or “won’t” (we’d guess) because they can’t tell a good fund manager from a poor one until the herd decides for them.

We, in contrast, are hot on size. If a fund has become too big, we’ll sell it and move to a more appropriately sized option. We’re also happy to back newer, smaller funds (which are often run by experienced managers who have left a large company).

This means we hold them when they’re building  a great track record, not resting on it. We can also secure attractive “founders” fee discounts, which further enhances our holders’ total returns.

Differentiator #5 - The Unheroic Journey

To make market-beating returns, a fund manager must be different to the market. However, different is great when it’s working, but painful when it’s not.

Working through pain requires a heroic disposition. This is why we only back managers who:

a) are different to the market (needed to outperform);

b) possess a heroic temperament (to endure the painful stretches).

However, your clients didn’t sign up for heroics. Painful journeys are unsettling. We know this. It’s why we choose heroic investors who are on different journeys. So while one is trapped in a metaphorical dungeon, they’re balanced out by another, who is slaying their dragon.

The result, if we get it right, is still an inspirational financial destination. But getting there is easier, as the journey is closer to what you expected it to be. This makes it decidedly less heroic – and therefore realistic – in nature.

What to expect

As equity-based investments, our fund returns will depend on the performance of equity markets. We don’t know in advance what this will be, so we can’t put a number on what to expect. But in terms of the “shape” of performance, and assuming that stock markets rise in broadly the same way they have in the past, we’d expect the performance of our fund range to look something like this:

So; our investors who have held the highest equity exposure over longer timeframes should receive the highest returns. The quid pro quo is that, over shorter periods when markets are falling, they should expect to experience steeper falls too (see below).

Such periods have, in the past, proved relatively short-lived, and have been followed by periods of recovery that raised markets to new highs. But they can be stressful while they’re happening, so should not be taken lightly.

Charts are for illustrative purposes only, they do not represent any specific timeframe or level of return. Past or simulated performance is not a guide to future returns.

Important notice

This content is intended for retail investors and their advisers and has been approved and issued as a financial promotion under section 21 of the Financial Services and Markets Act 2000 by Downing LLP. Any subscription to the fund should be made on the basis of the relevant product literature available from Downing, or from the ACD, Valu-Trac Investment Management Limited and your attention is drawn to the charges and risk factors contained therein. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Capital is at risk and investors should note that their investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.

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