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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.
Energy transition and the race to net zero have put renewable energy at the forefront of future energy strategies. Meanwhile, geopolitical flashpoints and global conflict are redrawing energy supply lines - underlining the urgency to accelerate the adoption of renewables.
The International Energy Agency (IEA) forecasts that renewables could supply 90% of the world’s electricity by 2050. But rather than depending on predominately top-down government initiatives, IEA analysis shows that a large proportion of the funding for the energy transition will have to come from the private sector and institutional investment.
The restructuring of electricity markets around the globe has created a fertile environment in which both private and institutional investors can participate and invest. And as the investment communities’ understanding of renewables has evolved, so has our emphasis on diversification of renewable energy sources.
Stability in an unstable world
We recently conducted a research study with 100 UK institutional investors and wealth managers, collectively responsible for around £118 billion in assets under management.
Ninety-four per cent of respondents said the renewable energy sector would become more attractive for investments in the next three years. Many of those investors see the benefits of diversification in renewables – 67% highlighted diversification as a reason for an increase in allocation.
To sustainably power our world, we must combine and blend renewable sources to create well-diversified energy solutions - from wind to solar to hydroelectric power and battery storage.
We believe diversification brings two main benefits. Firstly, it broadens the pipeline of opportunities for investments, which ensures a portfolio can grow into the future. Secondly, it is expected that diversification will increase the stability of returns to investors.
From a risk perspective, constructing a diversified portfolio that balances a mix of energy sources can cope better with external shocks and adverse events.
Tom Williams, Downing’s Head of Energy & Infrastructure, commented: “It is clear that more renewable energy generation is necessary. More commitments and further investments are very welcome, but the nature of the investment and the right recipe for a sustainable energy mix need to be clearly thought through.
“For us at Downing, it is essential that for an efficient, reliable, cost-effective and sustainable energy system, diversification is taken into account. The way forward has to be combining different technologies in different geographies with increased interconnection between those geographies.”
Depth of diversification
The only constant of weather is that it is variable. Technologies such as wind, solar, and hydropower are seasonal and intermittent. By combining investments in multiple asset classes and geographies, you reduce the reliance on any single technology, any given natural resource and particular weather patterns.
For example, Sweden is divided into four different power price zones. Each zone has its own fundamentals of supply and demand of electricity and, while there are transmission cables between the four zones, each zone has its own power price. Consequently, energy sold within a distinct zone predominately originates from that zone. Investing in all four zones provides diversification and further exposure to different weather patterns.
Within the Downing Renewables & Infrastructure Trust portfolio (DORE), we have 19 hydropower plants spread across multiple rivers and three different price zones in Sweden, allowing us to capture price variability between these price zones.
As a result, DORE has created a platform for expansion in the Swedish hydropower space, allowing it to acquire single hydropower plants across Sweden.
Tom Williams commented: “Our investments in Sweden are all in existing operational hydropower plants that have been in situ for decades. When they regulate water flow, they do so from smaller structures on existing natural bodies of water, such as lakes, that have been there for even longer than the power plants.”
Diversifying by geography, including power price zones, provides a significant pipeline for renewable energy investment opportunities that benefit from the variation of energy pricing and the spectrum of regulatory policy regimes.
In the UK, hydropower is often overlooked as a source of renewable energy. But hydro forms a key part of the energy transition in Northern Europe due to its ability to hold energy back in hydro reservoirs and generate electricity when other renewable energy sources are at low production. This helps reduce price volatility and maximises the value of the energy stored in reservoirs for both end users and investors. Some of the electricity used in the UK is sourced from Scandinavian hydro reservoirs through the utilisation of the North Sea Link, an interconnector cable from Norway to the UK.
How to achieve revenue diversification
Revenue diversification can be achieved through subsidies, power purchase agreements (PPAs), other forms of fixed revenues and exposure to the merchant price.
In the UK, PPAs allow long-term contracts under which a business agrees to purchase from a renewable energy generator. They provide stability to investors and project developers, which eases the path to constructing new renewable facilities.
Investors in the UK can benefit from high degrees of fixed revenues via renewable energy funds. Combined with hedging strategies, this significantly reduces risk exposure to the merchant power price and provides relatively stable revenue returns.
The project timelines of a renewable energy asset also offer different return profiles. Operational projects provide immediate yields, while construction and development-stage projects provide additional risk-adjusted returns.
Committed to the future
Macroeconomic tailwinds and the green energy transition are attracting more institutional investors to renewable energy exposure. While the asset class offers extraordinary opportunities, to give the best chance of stable and sustainable returns, investors need to consider the level of sophistication required by the portfolio manager to create a truly diversified portfolio of investments with a well-managed balance of risk and return.
At Downing, we have a truly holistic ambition: to create an investment approach that supports the transition to a net zero, cleaner, greener future. At the very foundation of this commitment lies the pillars of diversification.
Please note: Capital at risk. Returns not guaranteed. Changes in exchange rates may have an adverse effect on the value, price or income of investments. 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.
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