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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.
ESG under fire?
As we step into 2024, the world of sustainable investing continues to evolve. The term Environmental, Social, and Governance (ESG) is turning 20 years old and is being met with mixed emotions.
Despite growing in popularity at the start of this decade – as for any boom, a day of reckoning was inevitable – ESG faces challenges and scepticism. This is particularly true in how it has impacted carbon emissions (witness the relentless increase in parts per million carbon in the atmosphere), its political backlash in the US (with the notion that returns should always be the primary focus for fiduciaries) and the trade-offs we are sometimes forced to choose. For example, unethically-sourced materials for batteries vs poorly governed tech companies. Adding return to this means these will never, or very rarely, be all wins.
Therefore, the challenges have even gone as far as people asking “is ESG dying?” I do not take that extreme view but believe that responsible investment is maturing and evolving instead and remains important for a more sustainable second half of this century.
So, despite these challenges, ESG remains a critical tool in the investor's arsenal, albeit one that requires careful management.
The rise of natural capital and regulatory changes
One promising development in responsible investing is the emergence of natural capital. Simply, this combines responses to climate change with broader ecological considerations. While the COP28 summit did not yield binding, enforceable emissions targets (and indeed it could not have done this), it marked some progress.
Emissions from fossil fuels causing climate change have been compared to cigarettes causing death: the science is clear. And for the first time at a COP, fossil-fuel based energy systems were discussed with some intention for action to ‘transition away’ instead of ‘phase out’. Accompanying this outcome from COP28 for natural capital, in 2023, because of the launch of a new disclosure framework and investor stewardship collaboration, nature is being measured and assessed for the first meaningful time.
And regulatory changes are bringing much-needed structure and rigour. These include:
Consumer-focused labelling: new regulations to enhance transparency, allowing consumers to make more informed decisions based on sustainability criteria and maybe help with the trade-offs just mentioned.
Combatting misleading sustainability claims: the FCA is cracking down on greenwashing and misleading statements, ensuring that claims about sustainability are accurate, complete and substantiated.
ESG data providers: enhanced oversight of ESG data providers will ensure the reliability and integrity of the information used in responsible investing, up to selecting which assets make it into a fund labelled as green.
Stewardship: one element to future success
Central to the evolution of responsible investing is the concept of stewardship. Engaging in meaningful dialogue about sustainability is a core fiduciary duty. If the value of any investment is its future cash flows discounted back to today, and these cash flows can go up or down because of sustainability opportunity or risk, isn’t it crucial for active investors to understand and then manage these impacts? This involves not just assessing current practices but also influencing behaviour towards more sustainable and responsible models through partnership and collaboration, without forgetting – for listed equity – the rights we have to vote against directors or to propose shareholder resolutions.
Conclusion
As we navigate through 2024, the outlook for sustainable investing is cautious. The integration of core sustainability concepts into broader investment, corporate, and geopolitical activities signals maturing. While challenges remain, the developments in natural capital focus, regulatory changes and enhanced stewardship practices provide a solid foundation for responsible investment to thrive.
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