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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.
What helped or hurt the Downing Fox portfolios last year?
We’re pleased with how the Downing Fox portfolios performed in 2023, but we can see how you might look at this chart of the year and think “meh”.
The simulated Downing Fox Model portfolios referred to in this review are based on the models used to manage the VT Johnston Portfolio Funds and the VT Downing Fox Funds.
Simulated and actual past performance are not a reliable indicator of future performance. The simulated Downing Fox Models performance is based on the models used to manage the VT Johnston Portfolio Funds and the VT Downing Fox Funds. Source: Morningstar. Total return from 01.01.2023 to 29.12.2023. ARC PCI refers to private client index which is priced monthly. Downing Fox and IA are priced daily. Downing Fox Model Simulated Portfolios include an Annual Management Charge to reflect Downing’s own AMCs: 100% Equity Strategy = +0.5%; 80% Equity Strategy = +0.4%; 60% Equity Strategy = +0.3%; 40% Equity Strategy = +0.2%.Weightings rebalanced month end. Note, Downing performance is simulated. Any statements regarding future performance may involve known or unknown risks, uncertainties and other important factors, which could cause actual performance to differ from expected.
So that’s the question we’ll address in this review: Why do we think it was OK to be average-to-sub-par in 2023?
Let’s kick straight in with the three headline reasons:
Our simulated portfolios performed strongly amid the inflationary horror show of 2022, and much of the plummeting stuff we avoided that year bounced back in 2023. So we looked a little slow compared to many rebounding competitors, as we had less exposure to the assets that swan dived the previous year.
A single year is short-term and we invest on a long-term basis. We’re trying to ‘win’ substantially every ten years, not every one year, and so aren’t overly emotional if we don’t outperform in a specific 12-month period (although we never want to dramatically underperform – see below).
2023 was a “kryptonite” year for how we invest: We face an uphill battle when only the stock market’s biggest companies outperform and when corporate bonds fare a lot better than government bonds. 2023 saw both.
It’s also worth remembering the point of the Downing Fox portfolios. We want investors to benefit from holding great active equity funds. Obviously, that means finding great active equity funds to populate the Fox portfolios, but it doesn’t stop there: Once we find the great funds (which we think we have), if we don’t blend them carefully, our own portfolios could become too hot to handle, causing your clients to panic sell (and therefore not benefit from holding great active equity funds).
What causes clients to panic sell?
Dramatic underperformance.
Even if that dramatic underperformance comes on the back of dramatic outperformance (many holders buy a fund towards the end of a good run, so they only experience that good run reversing). This is why we’ve designed the Downing Fox funds and process the way we have. We are, as far as possible, trying to meaningfully outperform without traumatising you through bouts of dramatic underperformance. We’re not magic though: We will underperform at times, but we fight hard to make that underperformance as dull and bearable as we can.
And our portfolios’ performance in 2023 was nothing if not dull and bearable. Which is why we’re OK with it: 2023’s conditions were a nightmare for our investment philosophy and approach. So, to have avoided giving our investors an actual nightmare falls within the bounds of our mission.
This content is intended for retail investors and their advisers and has been approved and issued as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). 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 available from Downing LLP or from the ACD, Valu-Trac; 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.
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. This document contains information and analysis 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 the content of this document, 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 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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