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A climate wish list: what are the ideal outcomes from COP28 for any climate-focused investor?
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Roger Lewis
Head of Sustainability and Responsible Investing
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.
Sharing a birthday with the date the Paris Agreement on Climate Change was signed in 2015, the idea for this article was influenced by previous COPs and, in particular, their outcomes, agreements, protocols, statements, or even breakdowns.
Copenhagen from 2009 comes to mind. Nicknamed ‘Hope-enhagen’ beforehand, it delivered nothing. And despite the other 27 previous COPs, none have achieved the simplest solution to climate change: commitments that legally bind a country, company, or community to reduce the emissions of six types of greenhouse gas. Given this, what would a birthday wish for COP28 outcomes look like?
In January, we predicted that energy and climate change would continue to be top themes this year for responsible investors, alongside greater regulatory focus on ESG, and nature emerging as a new topic. There has indeed been a focus on climate change policy, technology, spend, mitigation, and adaptation. But what of actual action to avoid the worst effects in the second half of this century?
The deployment of current renewable energy technologies continues, led by solar and national-level targets and investment-level opportunities. It’s similar for wind with increasing capacity plans, and for batteries to complement renewables’ intermittency. Major power utilities are decarbonising with emissions reduction targets, green capex, lobbying, and disclosure. Big oil continues either researching or constructing facilities for carbon capture utilisation and storage, not least because this offers a future revenue source in a greener world.
First wish-list item: easing regulation for renewable power
The counterweight to these encouraging developments is the threats that exist. Solving these would be the first wish-list item to come out of COP28. There are delays and problems in permitting for renewable installations and grid connectivity. This leads to the real risk that clean power generated is lost. Few countries can compete with the billions of green spend of the US’s Inflation Reduction Act, though they can still reduce administrative complexity for renewable power. An additional linked risk is the reversion to fossil fuels. The delicate balance for policymakers in Dubai in December is energy security, costs of living, and decarbonisation, which can lead to fickle attitudes towards gas and coal.
Second wish-list item: commitment to climate change targets
With a record hot June and then July past us, and stories of record-breaking extreme weather and temperatures continuing, limiting warming to 1.5 degrees is sadly looking less and less likely. Indeed these acute incidents remind us that 1.5 is an average global rise and some regions (read: Artic or Sahel) will be affected much more, and indeed likely already feel this. Is 1.7 degrees the new best case, and should COP28 recognise this? Probably. Making realism on targets – with renewed vigour and commitment – the second wish-list item.
Third wish-list item: enabling growth of renewable energy
After hyped launches at the start of this decade, there have been setbacks to net zero carbon. Some investors, insurers, and banks have left their respective sectors’ commitments, like net zero asset managers. The mid-year progress update from the Climate Change Committee to help the UK government is prescient. It wants to see shifts towards actual implementation – including renewables, EVs, heat pumps, hydrogen, and carbon capture – in order to meet stated targets and the latest, sixth carbon budget. Whichever temperature target is agreed, or commitment is supported, or government sentiment is in force, climate change always returns to mitigation and reducing greenhouse gas emissions. And current – plus future – renewable power technologies play a central role in this. This makes a continuing commitment to enabling the renewable power sector’s growth the third item on the COP28 wish list.
Fourth wish-list item: offsetting carbon
Adding a fourth and final item, related to net zero, is carbon offsets. What might a more mature market, catalysed by agreements at COP28, look like? Will there be no more scandals around verification or the rule of law or rule of property? Outlawing ‘carbon neutral’ claims, as the EU is pioneering for 2026, could be a big theme. And there could be further clarity on quality removal offsets with additionality like air capture, on working with suppliers under the so-called insetting, and on the ability of countries to trade offsets to meet their targets.
What do future COPs have in store for us?
Looking ahead beyond this year’s COP28, we can certainly expect promises and progress towards these four items. Legally binding reduction targets – the biggest wish – are deliberately omitted here given the unlikelihood, but the Global Stocktake of countries’ nationally determined contributions will be a good test of the Paris Agreement’s logic of ‘name and shame’. The Global Decarbonisation Alliance announced in May is another positive indicator, helping item number two. But a credible, international framework that every single stakeholder commits to, that meets this small list plus the many more required commitments? Now that’s something worth wishing for.
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