None of the information provided is investment or tax advice. You should always read the associated risks before deciding whether to invest. These can be found on the product pages as well as in our risks overview. Please confirm you have read the information above.
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.
I'm unstoppable I'm a Porsche with no brakes I'm invincible Yeah, I win every single game I'm so powerful I don't need batteries to play I'm so confident Yeah, I'm unstoppable today
- Sia
My colleague, Alex Paget, recently wrote a fascinating piece about the unstoppable rise of the Global Titans - the largest stocks in the world that have come to dominate indices. After 14 years of rise, their outperformance over the rest of the market has reached the widest margin it has ever been. As Alex points out, the consequence of this incredibly narrow market is that almost no active manager (just 2.5% of his 1700 fund sample!) has managed to beat the Global Titan Index over the last 12 months.
If you can't beat them, join them!
So what did a fund have to do to beat the Titans? Simple - just own those same Titans but in even greater weight than the index.
The table below is unashamedly stolen from Alex's article - it shows the most popular stocks held by those rare funds that managed to outperform over the last 12 months. Microsoft, Nvidia, Amazon, Alphabet, Meta … forget about diversification, that foolish notion would have only diluted returns!
Source: Morningstar, 29.02.2024. Past performance is not a reliable indicator of future performance.
Will the Titans hit an iceberg or “will their performance go on”?
From our European perspective, this domination of returns coming from a small group of stocks is something that we have also seen here. The FTSE 100 has risen by just over 21% since the start of 2021, easily trouncing the 2% return from the FTSE Small Cap index over the same period. Quite rightly, our UK-focused fund managers such as Rosemary Banyard, Judith Mackenzie and Josh McCathie have been shouting about how cheap UK smaller companies have become.
In Europe, it has been even more extreme. The largest 50 stocks in Europe have risen by 32% since the start of 2021. This is an astonishing 37% better return than the small cap index which actually lost you money in absolute terms over the last three years.
Source: Bloomberg 1 January 2021 to 18 April 2024. Past performance is not a reliable indicator of future performance.
Fool me once…
We discussed this extreme difference with some of our clients last November, suggesting that the degree and longevity of small-cap underperformance must reverse at some point. Small caps promptly outperformed in December, our fund had one of its best months of performance and we felt like market timing heroes.
Since then, however, it has been one-way traffic. The Stoxx 50 rallied hard into the year-end and then has continued to power ahead in the first three months of the year. Small caps, conversely, have done nothing but give investors a fresh headache.
Looking for lifeboats?
Suitably reminded that we should stick to stock picking rather than macro predictions, the chart below illustrates how we view the current market situation. The data looks back over the last 24 years and plots the return an investor would have received on a rolling three- year basis from a small-cap portfolio relative to its large-cap equivalent in both the UK and European markets.
Source: Bloomberg 1 January 2003 to 29 March 2024. Past performance is not a reliable indicator of future performance.
Interestingly, UK small caps have been here before, most notably during the financial crisis in 2008/9 when they had a torrid time.
In Europe, however, we are in uncharted territory. Small caps have pretty reliably outperformed their larger brethren over every three-year period for much of this century, including even (more or less) during the financial crisis.
Not anymore. Whether it is liquidity or interest rates or passive flows or something else, European small caps have never been so far underwater before, nor for such a long time.
Our conclusion is simple - whilst many of the European mega caps that have performed so well are undoubtedly great businesses, in many cases their valuations look pretty stretched. Perhaps small caps could be the lifeboat that is needed if (or maybe when?) mega caps hit the proverbial iceberg and start taking on water faster than Celine Dion can write another hit song?
Risk warnings: 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 our funds should be held for the long-term and are higher risk compared to investments solely in larger, more established companies. 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.
Important notice: This content 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. This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. 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: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
.jpeg)
