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The use of hydropower globally needs to increase by two-thirds by 2050 to curb rising temperatures
Nordic countries in particular offer considerable investment potential for this type of hydropower facility, given the region’s favourable geography
As well as offering stable, resilient and more predictable returns, hydropower also resembles an ESG-positive investment
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.
Hydropower is one of the oldest and most widely-used clean energy source, accounting for more than 60% of the world’s renewable generation. Furthermore, if the world is to decarbonize and meet the climate goals set in the Paris Agreement, hydropower must more than double by 2050. In this insight, we explore the evolution of hydro power, its role in the global transition towards cleaner energy, and discuss why investing in hydropower should form a growing part of a diversified investment portfolio.
Waves of change
Perhaps the earliest use of hydropower dates to the third century BC, when the ancient Greeks constructed water mills to grind grain and perform other mechanical tasks. But hydropower, as we know it today, first emerged in the 19th century, with the creation of the electrical generator. The first hydroelectric power plant began operating on September 30, 1882, in Appleton, Wisconsin.
Fast forward to 2022, hydropower supplied one-sixth of the world's electricity – more than all other renewables combined. And with the need to transition towards a greener global economy fuelled by clean energy growing every day, increased investment in hydropower will be paramount over the coming years.
Turning the tide
While the adoption of renewable energy has increased considerably in recent years, it still falls short of climate requirements. According to the International Energy Agency, renewable energy sources made up about 26% of the world's total energy consumption in 2020. This must rise to about two-thirds by 2050 if we are to curb rising temperatures and deliver on net zero.
Greater investment in hydropower will be instrumental in achieving net zero. Hydropower is one of the most efficient sources of renewable energy, producing the most energy per unit of capacity of all renewable technologies. But perhaps most important to the clean energy transformation is hydropower’s contribution to the security and flexibility of electricity provision.
Hydropower plants have the capability to increase or decrease their electricity generation. This, along with their water storage capabilities, permits hydropower facilities to adjust rapidly to demand swings and patch any holes in energy supply that may result from other renewables – particularly solar PV and wind, whose energy production output hinges largely on uncontrollable factors such as the weather and time of day. This makes hydropower instrumental in supporting the rapid deployment and integration of renewables into the global energy mix.
Go with the flow
Given its sustainability credentials, it is unsurprising hydropower is already the most widely used source of clean power, representing more than 60% of the world’s renewable generation. Yet, to meet the net zero emissions by 2050 scenario, hydropower must maintain an average annual generation growth rate of about 3% from 2022-2030 to provide approximately 5700TWh of electricity per year.
While hydropower’s growth potential poses a compelling investment opportunity, the asset has historically been underrepresented in investment portfolios, with institutional investors only dipping their toes in the water in recent years. Research indicates wind and solar assets are much more frequently held by institutional investors than hydropower assets, while few general investors have exposure to hydro at all.
This is largely due to the price and complexity of accessing investment opportunities in hydropower, as well as the regulatory challenges investors face when seeking to acquire existing hydropower facilities. In addition, unlike many alternative renewables, hydropower plants are not typically subsidised by governments.
Powering diversification
Aside from its ability to deliver stable and resilient cashflows, hydropower offers significant diversification potential. Given hydro plants are typically independent from fixed term government remuneration structures, they benefit from greater flexibility in the electricity prices achieved on independent power markets.
Moreover, the proliferation of smaller facilities such as run-of-river hydropower plants – which harness river energy and offer little or no storage capability – provides investors cheaper and easier access to hydro. Their lack of a reservoir means they have a smaller impact on the surrounding natural environment.
Nordic countries in particular offer considerable investment potential for this type of hydropower facility, given the region’s favourable geography – including its mountainous terrain – and its ongoing push to supply more renewable power to the wider European market.
Hydropower in action
In 2022, Downing acquired a portfolio of two operational run-of-river hydropower plants situated in Sweden, forecasted to produce 18GWh per year. These are Downing’s first hydropower assets located in Sweden’s southern SE4 pricing region, which has the highest wholesale power prices in the country and benefits from export cables to continental Europe.
ESG credentials
Aside from improving national energy security through fostering greater access to clean and reliable energy, the construction and maintenance of hydropower facilities creates numerous high-quality jobs within the local community. This will have a positive impact in many of the less economically developed regions where hydropower growth is expected over the coming years, including parts of Africa and Latin America.
There is also meaningful progress being made on the governance of hydropower facilities across the world. For example, the European Investment Bank – which provides funding to projects that support EU objectives, most notably actions to mitigate climate change – has established a set of comprehensive guidelines for hydropower facilities that carefully consider the needs of local communities and the environment.
As well as offering stable, resilient and more predictable returns, hydropower also resembles an ESG-positive investment. While the case for ‘E’ in ESG regarding hydropower is somewhat obvious, the social aspect is certainly worth considering. Institutional investors looking for an investment that diversifies their portfolios and offers strong ESG characteristics should consider the hydropower opportunities that present themselves whether that’s in the Nordics or the UK.
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