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2023 mid-year outlook: Responsible investors need to stay vigilant of potential risks and opportunities
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Roger Lewis
Head of Sustainability and Responsible Investing
Solar and wind technology are driving the renewable energy sector's upward trajectory
Investor engagement remains positive and impactful despite the greater likelihood of exceeding the 1.5°C global warming limit
The EU's Sustainable Finance Disclosure Regulation (SFDR) comes into force this year
The integration of nature considerations into investment decisions has gained prominence
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.
As we reach the mid-year mark, it is essential for responsible investors to assess the current landscape and identify key factors that can significantly impact their investment strategies. In this review, Downing's Head of Responsible Investment, Roger Lewis delves into four critical areas impacting the UK—energy, climate, regulation, and nature—to provide valuable insights and alert investors to potential risks and opportunities.
Energy
The renewable energy sector continues its upward trajectory, driven primarily by solar and wind technologies. In addition, national-level targets and investment opportunities are contributing to the rapid deployment of renewable energy.
However, there are potential threats - one recent example is the reports of cash and production issues affecting major wind turbine manufacturer Siemens Gamesa. Additionally, concerns over mining, geopolitical challenges, and human rights issues related to battery materials like nickel and lithium pose further potential risks to the adoption of renewable technology.
Furthermore, delays in permitting renewable installations and grid connectivity also present a significant risk of clean power generation being lost. However, streamlining administrative complexity can mitigate this risk.
It is important for policymakers to exercise a delicate narrative around energy security, decarbonization and costs of living, as they each can lead to fluctuating attitudes toward fossil fuels.
Climate
Despite efforts to limit global warming to 1.5°C, recent extreme weather events and rising temperatures suggest that achieving this target is becoming increasingly challenging with certain regions, such as the Arctic, already experiencing the effects of climate change disproportionately.
Worryingly, monitoring atmospheric CO2 levels reveals that we have surpassed the crucial threshold of 420ppm, indicating a greater likelihood of exceeding the 1.5°C limit.
However, it's not all bad news. While setbacks have been observed in the net-zero carbon agenda, investor engagement remains positive and impactful, including votes on climate transition plans this AGM season. Climate transition plans and the launch of Phase 2 of Climate Action 100+ indicate sustained momentum toward climate action. However, funding gaps for adaptation and mitigation efforts remain, necessitating increased collaboration between the public and private sectors, especially in emerging and developing economies.
Regulation
Asset managers have begun disclosing under the EU's Sustainable Finance Disclosure Regulation (SFDR) for the full year in 2022. This disclosure process has shed light on various indicators, including the social impacts of infrastructure - such as increasing job opportunities - and this has prompted deeper consideration of these factors. Ongoing developments, such as proposed rules for ESG ratings, future climate targets, and non-financial sustainability reporting, warrant continuous monitoring.
In the UK, attention is focused on policy advocacy and regulatory changes, including governance structures, effective stewardship, ESG professional competencies, ESG ratings and looser listing rules.
Nature
Following COP15 and the adoption of the Kunming-Montreal Global Biodiversity Framework, the integration of nature considerations into investment decisions has gained prominence.
Investors are increasingly incorporating biodiversity metrics into their ESG scorecards, emphasising the preservation and improvement of ecological conditions in investments.
For example, Downing has incorporated plans to enhance biodiversity on our solar sites. On our Andover Solar Site, we will be focusing on a substantial roll out of installations which support local wildlife: bird boxes, mouse boxes, bat boxes, beehives and hibernaculas (shelters occupied by dormant animals during the winter).
In addition, active ownership and investor engagement initiatives, such as Nature Action 100 and the Finance for Biodiversity Pledge, are gathering momentum. Reporting and disclosure at both corporate and investment levels are becoming more important, with the forthcoming launch of the Task Force on Nature-related Financial Disclosures (TNFD) expected to be a significant milestone.
As we evaluate the mid-year landscape, it is crucial for investors to remain aware of the prevailing trends and potential risks within the responsible investing sector. While renewable energy continues to thrive, challenges demand vigilance.
Climate change remains a pressing concern, necessitating sustained investor engagement and collaboration to drive meaningful action. Regulatory developments, such as SFDR and UK policy advocacy, require continuous monitoring.
By staying informed and responsive to these factors, investors can navigate the evolving landscape and make informed decisions to achieve their financial and sustainability goals.
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