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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.
It is hard to be particularly bullish on markets at the moment. The daily headlines make for gloomy reading – a devastating and protracted war in Ukraine, soaring energy and commodity prices, hawkish central banks and a cost of living crisis. Furthermore, a sharp rotation from growth to value this year has caught many investors off-guard, leading to a very wide range of returns. Investor reflection and soul-searching after such a difficult first quarter has prompted a series of difficult questions:
Do you still buy the dip or will equities follow the savage sell off in bonds?
Is now the time to double-down on the growth style which has outperformed for so long or are its best days numbered?
Has value become a crowded trade and how will it fare in a stagflationary/recessionary environment
We don’t pretend to have the answers to these complex questions and we are wary of anyone claiming to know what the future holds with any real conviction. These are some of the trickiest markets we have faced in our careers - a view likely shared by many other investors. With geopolitical concerns coming to the fore at the same time that central banks are tightening liquidity, markets will likely stay volatile for the foreseeable future.
Amidst all the doom and gloom, there are some glimmers of hope. While we are the first to acknowledge our limitations when it comes to predicting macroeconomics (and now geopolitics!), as stock pickers we embrace rapidly changing and volatile markets as it allows us to uncover new and often overlooked opportunities. Market volatility often leads to a much wider dispersion of stock returns which is good for active management and stock pickers. Is a broad, passive investment in Europe advisable right now given the headwinds? Perhaps not, but we believe there are certain stocks and parts of the European market that are very interesting. Our highly active, all-cap approach allows us to the position the fund to benefit from these opportunities.
For example, we believe one of the main long-term outcomes from the Ukraine conflict is a renewed and immediate focus on energy dependency in Europe and a reduced reliance on Russian oil and gas. This pivot away from Russia has taken on a new sense of urgency with Poland and Bulgaria being cut off and Putin threatening to turn the taps off completely if payments aren’t made in roubles. Germany is at particular risk, given its reliance on Russian gas and talk of a full-scale embargo is spreading panic through the industrial heartland of Europe. Indeed, the CEO of chemicals group BASF suggested any shutdown could plunge German business into its “worst crisis since the second world war”. Governments are responding to this crisis at speed. The European Commission plans to cut Russian gas imports by two-thirds this year, as part of a package to diversify gas supplies and accelerate decarbonisation efforts. This will require enormous investments in infrastructure, new sources of liquefied natural gas (LNG) and accelerating the build out of renewables.
When supply chains get redrawn on such a huge scale, there are beneficiaries and our ability to move down the market cap spectrum allows us to identify and invest in those winners. For example, Friedrich Vorwerk is a small-cap German company that is relatively unknown, but will play a key role in Germany weaning itself off Russian energy. With decades of experience, Vorwerk is a leading player in the design and implementation of critical energy infrastructure in natural gas, electricity and hydrogen. Utility and energy customers are now urgently turning to them, and Vorwerk’s biggest challenge is ramping up in advance of the massive influx of orders that it could win in coming months. There are other under-the-radar opportunities like this. Exmar is a small Belgian company that owns floating LNG infrastructure that could help European energy companies quickly realign some its gas supplies away from Russia in time for the winter.
Europe is changing fast. The energy transition was already underway with Europe leading the world with its green agenda. However, this voluntary and measured transition has now been escalated to an urgent case of energy security. The threat of energy rationing in Germany this winter is real, and governments and corporates are responding with a massive wave of investment. Amidst all the top-down noise and geopolitical newsflow occupying the market, we remain focused on hunting up and down value chains and finding (often contrarian) ideas that are set to benefit over the long term from a changing Europe.
Pras Jeyanandhan & Mike Clements
Managers, VT Downing European Unconstrained Income Fund
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 and are higher risk compared to investments solely in larger, more established companies.
Important notice: This document is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 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 authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
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