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Blowing in the right direction: A 101 on wind power technology
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Downing
The history of wind power technology and how it became a key component in clean energy production
How the world is embracing the technology and fast-tracking it as part of net zero pledges
The investment case for wind and how investing in the technology can form a valuable part of a diversified portfolio
Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.
The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.
The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.
The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.
Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.
Systematic Liquid Derivatives: Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions.
Strong security: The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.
Key benefits
Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t. We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team isseeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”
How the Fund is expected to perform in different markets
In bullish markets: UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
In neutral markets and normal market corrections: UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
In a sustained sell-off: if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
The average Cover to Capital Loss is targeted at 35%: the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.
Fund key risks
Performance: Capital is at risk. Investors may not get back the full amount invested.
Liquidity: Access to capital is always subject to liquidity.
Counterparty risk: Other parties could default on the contractual obligations.
Fund Structure
UK regulated OEIC fund structure, fully UCITS compliant
Daily dealing, at published NAV
Minimum investment: £100,000
SRRI: 6 out of 7
Depositary: Bank of New York
Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
I share-class: SEDOL: BM8J604 / ISIN: GB00BM8J6044
F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term.
Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. 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: 10 Lower Thames Street, London EC3R 6AF.
From a promising resource to an established energy source, wind power is now crucial to our future renewable energy mix. In the following insight, we look at the evolution of wind power, explore its role in the global energy transition, and discuss why investing in wind technology should form a growing part of a diversified portfolio.
Winds of change
Humans have reaped the benefits of wind power since it was harnessed to propel boats along the Nile around 5000 BC. And windmill infrastructure became part of the physical landscape by 200 BC, as the Chinese began to use simple windmills to pump water. Since then, the technology has been harnessed to mill grain and drain marshes in the Netherlands.
But perhaps the ground-breaking moment for the wind technology occurred in Denmark with the construction of a decentralised national electrification model. Danish pioneer Poul la Cour’s inventions would lay the foundation for modern windmill technology and wind power plants in Denmark and the world. Further innovation would follow – the United States government, led by NASA, undertook research into large commercial wind turbines that paved the way for multi-megawatt technologies.
From its experimental history, wind power has staked its claim for forming a part of a diversified investment portfolio and has become a key player in the transition to a net zero economy - it is now estimated that onshore and offshore wind will generate more than one-third (35%) of total electricity needs, becoming the prominent generation source by 2050.
A global transition
The IPCC (Intergovernmental Panel on Climate Change) has let the world know in stark terms that the Paris climate goals require a profound acceleration in the adoption of renewable technology. Wind power, along with other renewable energy sources, is expected to lead the way in the decarbonisation and transformation of the global electricity sector.
In 2021, Europe, Latin America and Africa & Middle East had record years for new onshore installations with €41.4bn invested in new wind farms in Europe alone. Meanwhile, 21.1 GW of offshore wind capacity was commissioned last year - three times more than in 2020. This crowned 2021 as the best year in offshore wind history – where market share in global new installations rose to 22.5%.
In Europe, the investments were split relatively evenly across the continent, although there is still a gap in provision. The REPowerEU agenda now wants the EU to expand its wind capacity from 190 GW today to 480 GW by 2030. This means building 35 GW of new wind turbines a year until 2030.
However, in 2022, the investment figure was €17bn in Europe - the lowest amount since 2009. It's a stark warning to governments and policymakers, who will need to restore investor confidence among recent market interventions and barriers.
The transition to net zero requires not only a shift to renewable sources, but also the servicing of increasing electrical demand – due to the electrification of huge energy-intensive sectors like transport and heat. Not only must we replace existing generation infrastructure with renewable energy, we also need to meet the increased demand for electricity.
Scaling up to power up
Policymakers are rising to the challenge. The European Union has committed to cut its 1990 level of greenhouse gas emissions by 55% by 2030, a key milestone in reaching climate neutrality in 2050. Scandinavian countries are also taking the lead. For example, in Sweden most wind farms run in grid-parity (the point at which wind electricity fed to the grid is at least as cheap as electricity from fossil fuels) without any governmental support incentive. The country is a global leader in decarbonisation and seeks to create a net-zero carbon economy by 2045. For the energy sector, the target is lofty: 100% renewable electricity production by 2040. A large proportion of Sweden’s electricity supply comes from hydro and nuclear power – but there is a growing contribution from wind energy.
Downing recently acquired the Gabrielsberget Syd Vind farm in northeast Sweden, which has an installed capacity of 46MW. The farm is powered by 20 Enercon E-82 2.30 MW turbines and is located on a plateau in north-eastern Sweden at approximately 220 meters above sea level, which is a suitable location to generate reliable energy levels. The project has been operational since 2011 and is expected to generate c.108 GWh of electricity per annum.
ESG credentials
The picture is brightening for the UK wind capacity too. The government is preparing the ground for more onshore wind in England following their announcement about relaxing onerous planning restrictions that have hampered renewable technology since 2015.
World leaders are coming to the consensus that every KWh of clean power counts in the fight against climate change – and wind energy is expanding its influence in the decarbonised future.
The case for ‘E’ in ESG regarding wind power is relatively self-evident with the potential for abundant clean energy. But there is also a social aspect. On-and-offshore wind farms can generate sustainable employment in marginalised rural communities. The wind energy sector has also strong governance aspects, as investors can invest in or alongside companies with sustainability embedded into their processes.
The investment case for wind
Not only does renewable energy investing contribute to a greener society, but energy infrastructure investments also secure a safer, cleaner future for us all and generate sustainable results for stakeholders over the long term.
Renewable energy investment projects such as onshore wind power have stable and predictable long-term cashflows that are often wholly or partly linked to inflation. Renewable energy investments also tend to behave like broader infrastructure investments – benefitting from government regulations and concessions. They also can act as an inflation hedge and diversifiers during financial crises.
Wind power is helping to transform the global electricity sector. The progress is a testament to renewable energy’s resilience and growing appeal as a sustainable diversifying investment that provides multiple environmental and socio-economic benefits.
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