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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.
Following the recent Budget announcement, some of the initial uncertainty has been alleviated. Yet the implications for AIM (formerly the Alternative Investment Market) are worth reflecting on. AIM has long served as a valuable platform for smaller, dynamic businesses seeking access to capital and growth opportunities. Periodic challenges – such as fiscal changes and shifts in regulation – have tested its resilience many times since its inception, but AIM remains committed to providing essential opportunities for small businesses.
Indeed, it is important to recognise that AIM’s value lies far beyond the influence of political shifts. AIM supports small and medium-sized enterprises (SMEs) that play a vital role in the economy, providing them with the capital they need to grow, create jobs and drive balanced development. At Downing, our approach is centred on this long-term potential. We use active management to uncover opportunities in businesses with durable fundamentals that can provide real, inflation-adjusted growth – particularly when temporary market fluctuations can make it easy to overlook their value.
When looking at AIM IHT solutions, it's worth noting that not all are created equal. Just as in discussions around active management, there’s a tendency to speak about AIM IHT options as if they were a single, homogenous strategy. In reality, our approach at Downing is distinctly targeted: we seek quality and growth at sensible prices in parts of the market that others overlook, aiming to navigate volatility with a commitment to fundamental strength. Through our ability to uncover opportunities earlier, we believe we can capture a broader and more lasting value for our clients.
In this context, and despite some legislative changes, we believe our AIM Estate Planning Service remains an attractive and distinctive vehicle for estate planning – offering a combination of capital growth and lower inheritance tax liabilities, all with our unique Wealth Guard protection. And there are some strong arguments why investing early can help maximise this opportunity.
Historical resilience and differentiated approach
While market behaviour can be unpredictable, the returns achieved through active management tell a different story. Our own example demonstrates that well-structured investments within AIM have the capacity not only to weather economic storms but also to significantly outperform market indices and peers over time.
Many AIM-focused strategies rely on larger, high-beta companies – often with lofty price-to-earnings (P/E) ratios. Our approach is deliberately more tempered. We seek fundamentally strong businesses at fair prices, which may mean we don’t capture every spike in upside, but it also spares us the more punishing declines when sentiment turns.
Our reasoning around this is quite simple. Under stable and perfect market conditions, paying a high valuation can work as growth is not interrupted; these businesses are ‘priced for perfection’. Our preference is to have some margin of safety in what we pay, knowing that the future is inherently uncertain - perfection is difficult to achieve, and it’s even harder to sustain. We have seen this dynamic play out since the end of 2021, as many stocks with high valuations, underpinned by growth that hasn't materialised, have started to fall.
For us, investing successfully over the long term and through the market cycles is as much about managing the downside as capturing the upside – there is little use in doubling your money in 5 years only for it to half in year 6. By remaining disciplined about valuation, we aim to balance the rewards of growth with a resilient approach to risk. Our aim is clear: to grow capital in real terms, steadily and sustainably through the cycles, capturing enduring value rather than fleeting highs.
Investing for lasting legacy
As at September 2024, our Service has generated a cumulative return of 177.3% over the 12 years since launch. This means that if you have invested £50,000 with us in 2012, your investment would be worth £138,6501 today net of fees alongside the added benefit of tax relief and being protected from 20% drop in net asset value of your investment2 – at no extra cost and while maintaining full access to your capital (subject to liquidity). Although past performance is not indicative of future results, our track record illustrates how long-term wealth creation through compounding can produce real growth, not just preservation.
What shouldn’t go amiss is that our solution is designed to be competitive not only within the AIM IHT space, but also across the broader UK smaller companies' equity market. We have not only performed above the 25 years annualised total return of UK listed smaller companies3, despite the challenging backdrop. When compared to traditional funds, our performance stands alongside some of the leading UK smaller companies OEICs4, with the added advantages of estate planning benefits and the 20% downside protection of the Wealth Guard. In other words, and while considering the volatility of AIM, we aim to deliver greater overall value for those seeking both growth and a tax-efficient pathway for wealth transfer.
As with all investments, the greatest benefits are earned through compounding, and it is best to start early. Estate planning solutions are often considered later in life, typically by those in their late 70s. However, investing earlier can allow for significant wealth compounding over the coming decades, making a significant difference in the long term. In light of the recent Budget, removing IHT relief on pensions, there may be an added incentive to explore reallocating assets from traditional pension funds into AIM IHT vehicles that offer similar growth potential along with a tax-efficient benefit for legacy planning. For those looking to enhance returns further, regularly committing part of their annual ISA allowance could help build real, inflation-adjusted returns over time, as these investments grow tax free.
Conclusion
Not all AIM IHT offerings are created equal. The challenge for advisers lies in selecting those that not only align with clients’ ambitions but also deliver lasting value. We believe that our approach stands competitively apart, combining active management, tax-efficient wealth transfer, and downside protection to create a thoughtful pathway towards enduring value. For those seeking both growth and legacy, we’re here to help navigate this journey. In doing so, we’re proud to support British businesses.
1 Cumulative return is the total percentage of gain or loss, assuming that all earnings are reinvested. It represents the overall growth of an investment from the beginning to the end of a period. Future value = £50,000 x (1+177.3/100) = £138,650
2 The Wealth Guard is designed to reduce the impact of any drop in the value of your investment. Should you pass away before age 90, your investment is automatically covered for any fall in value up to 20% on your net initial investment (i.e. the amount invested after charges). T&Cs apply.
3 As per the New Financial report, over 25 years the annualised total return of UK listed smaller companies (including AIM) has been 7.4%.
4 Top 5 best performing funds as per IA UK Smaller Companies equity sector classification generated 60.8%, 53.4%, 51.7%, 45.8% and 43.3% cumulative return respectively over the past 5 years. Our Service delivered 45.6% return over that same time period.
Risk warning: Capital is at risk. The value of investments and any income derived may go down as well as up and investors may not get back the full amount invested. We recommend investors seek professional advice before deciding to invest. Any investment should only be made based on the Brochure and T&Cs; your attention is drawn to the risk, fees and taxation factors contained therein. Tax treatment depends on the individual circumstances of each investor and may be subject to change. The availability of tax reliefs depends on investee companies maintaining their qualifying status. Investments in smaller companies quoted on the Alternative Investment Market (AIM) can be more volatile and less liquid than those in larger, more established companies listed on the London Stock Exchange. Return is the value of investments, plus cash, including income, after deducting all charges, excluding any initial fee. Please note that past performance is not a guide to future performance.
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.
This article has been approved and issued as a financial promotion under section 21 of the Financial Services and Markets Act 2000 by Downing LLP. 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.
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