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Downing Renewables and Infrastructure Trust (DORE): The power of diversification
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Downing
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.
Environmental Finance spoke with Tom Williams, head of energy and infrastructure at Downing LLP, to explore how diversification sets DORE apart from other renewables funds.
Environmental Finance:What is the benefit of DORE’s geographical and technological diversity?
Tom Williams: Each of the renewable energy technologies we invest in (so far hydro, solar and wind) is dependent on a natural resource, which can be seasonable and variable. To mitigate against those factors, we invest across a spread of geographies and technologies whose generation profiles bear little correlation to one another.
There are two main benefits when diversifying by geography. Firstly, there is the opportunity to invest in various renewable technologies, because the topography is different – for example, the UK’s geographical features don’t lend themselves to hydropower in the same way that Sweden’s do.
Secondly, when operating in multiple geographies, you have a better chance of consistent energy generation.
Put simply, when it’s raining, hydropower is most effective, but solar power will suffer. Conversely, when it is sunny, there is less chance of wind or rain.
EF: Why are these renewable energy projects that DORE targets so crucial right now?
TW: DORE is an article 9 fund, with a core sustainable investment objective – namely facilitating the transition to net zero through its investments. The transition to net zero requires us not only to shift generation to renewable sources but also to fulfil what will be an increase in electrical demand because of the electrification of huge energy-intensive sectors like transport and heat. So not only are we replacing existing generation infrastructure with renewable energy, but we're also meeting increased electricity demand.
Storage also plays a massive part in this transition, because as you get more renewables on the grid you have more intermittency and you need more flexible sources of energy available to be able to cope with the swings created by that intermittent generation. Batteries can play a significant role here, but currently they only last for one or two hours. However, hydropower reservoirs are a form of flexible duration energy storage which can be measured in hours, days, weeks, months and seasons.
EF:Why are your run-of-river hydro plants better for the environment than traditional hydro dams?
TW: Firstly, our investments in Sweden are all in existing operational hydropower plants which have been in situ for decades. Because they are mostly run-of-river plants, they simply take in water from the rivers rather than trapping water behind a large dam. When they regulate water flow, they do so from small structures on existing natural bodies of water that have been there for even longer than the power plants (and so have their own very established ecosystem).This modest regulation of water flowinterferes with the existing environment to a significantly lesser extent than, for example, the construction of a new large dam which could flood a large area of land and destroy the existing habitat.
We have a significant programme to bring those hydropower plants up to date with the very latest in modern environmental standards, which also forms part of our rationale of investing in these assets. Our latest acquisition for example has a new stream that has been created to allow fish to bypass the facility.
EF:What makes DORE attractive to investors?
TW: We’ve achieved a total NAV return of 16% on the post-initial public offering (IPO) proceeds in the 15 months since the IPO, which is attractive to investors.
Part of the reason for this has been our ability to influence when we produce electricity in our hydropower portfolio and weight our production to times when energy prices are higher.
The capture rate, which is the discount you receive to the energy system price, is currently a big issue in the renewable energy industry. However, with our approach of combining different technologies with different production profiles in the same price zones, we are able to mitigate the effect of technology-specific capture rates. This is an incredibly powerful tool and enables our assets to avoid some of the biggest concerns with renewable energy.
EF:How does DORE's access to Downing’s full-service asset management team set it apart from its competitors?
TW: Consisting of more than 26 people, our asset management team is focused solely on preserving and enhancing value in our energy and infrastructure portfolio. The team includes electrical, mechanical and civil engineers, accountants, contract compliance specialists and data analysts who examine 3 billion data points across our assets in order to identify trends and issues in real time.
We are then able to analyse this data to see how we can improve the operations of our assets immediately.
If you outsource your asset management function to third parties, as most asset managers do, that process is very different. The biggest issue here is data. The quality of data is often significantly reduced to very few data points, which would only be seen in a report weeks after they occurred, making it difficult to make real-time decisions or take pre-emptive action. We are fortunate that, with the people we have and the systems we have implemented, we can act with real-time data.
So, having the in-house team is a fundamental part of what we do and a big differentiator for us, versus our peers.
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