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SLLs can provide another tool for tackling the challenge of reducing embodied carbon in new schemes
SLLs are loans where the interest rate is linked to the borrower's ability to meet pre-defined sustainability targets.
Our goal is to enable investees and borrowers to realise their growth plans by providing a flexible sustainability-linked loan framework for developers' capital needs
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.
Investors are growing increasingly aware of ESG and sustainability-related risks in the property sector against the backdrop of accelerating climate change. In the following insight, Parik Chandra, Partner and Head of Specialist Lending at Downing LLP, and Roger Lewis, Head of Responsible Investment explain how the growing adoption of sustainability-linked loans (SLLs) and related frameworks can help to raise ESG standards in residential property development.
ESG-focused institutional investing is emerging as a major theme in residential property development. A recent Downing property report highlighted that 76% of the surveyed pension schemes expect a greater focus on ESG over the next three years.
The report also found that nine out-of-ten pension funds believed that lending to support residential property developers will play an important role in helping defined benefit schemes meet their ESG goals and tackle net zero challenges.
Tackling the whole of the problem
Achieving net zero carbon by mid-century will require an ambitious economic transition, involving every company, lender, insurer, and investor. From residential homes to commercial real estate, the buildings hold a significant amount of carbon, both from powering and heating (or cooling, especially as the world warms), and locked-in or embodied carbon. Estimates suggest up to two-fifths of emissions globally are from buildings, split three-quarters operational and one quarter embodied. This means being realistic about a long-term strategy for achieving net zero. It also means targeting the whole of the economy, and all types of carbon.
This shows the potential reach of SLLs compared with directly financing green projects. Institutional investors and developers are beginning to take note, as SLLs provide another tool for tackling the challenge of reducing embodied carbon in new schemes.
Deconstructing net zero
To achieve carbon neutrality by 2050, the role of lenders as the link between institutional investors and developers will be crucial in the transition.
But there are major challenges. The Environmental Audit Committee (EAC), a group of parliamentarians, warns that, to date, there has been a lack of government impetus or policy levers to assess and reduce these emissions. The EAC believes a carbon tracking requirement should be fully incorporated into building regulations.
While there are hurdles to overcome on top-down policy progress, investment managers are responding in two ways. First, SLLs can support positive ESG outcomes and enhance risk-adjusted returns. For example, through our SLL framework, we apply externally recognised principles and conduct target-driven dialogue with our borrowers. Second, through systemic stewardship and advocacy through engaging with policymakers – for example by responding to consultations – on areas like green homes.
Shades of green
SLLs are loans where the interest rate is linked to the borrower's ability to meet pre-defined sustainability targets. Unlike a ‘green loan’, the project that achieves funding doesn't have only one main sustainability objective for its use of proceeds.
Instead, SLLs provide a general-purpose facility. For Downing, we have referenced the ICMA SLL principles in creating our framework and the overarching objective of our SLLs is to incentivise and reward the borrower’s achievement of ambitious and pre-determined sustainability performance objectives.
We base this on a borrower’s sustainability strategy, targets and objectives, which are linked to an ESG scorecard; this comes after a discussion on the subject in all initial loan conversations. Relevant ESG factors need to be material, measurable and benchmarked – and we require the disclosure of the calculation methodology. The ESG scorecard also refers to the UN sustainable development goals. Once the scorecard is completed, we assess it to determine an expected sustainability score at practical completion. Feedback will be provided where we highlight potential improvements to the score. For the verification SLL principle, once the scheme has been completed, a third-party assessment of ESG data provided in the scorecard will be undertaken by a specialist sustainability monitoring surveyor.
Sustainability Performance Targets
ESG integration includes both minimum standards and aspirational targets. Sustainability factors covered are climate risk (physical impacts), carbon emissions (embodied in materials and operational e.g. energy, renewables & efficiency), water & waste management, any biodiversity initiatives, examples of engagement with community and staff, and any certifications and memberships.
At the core of what we do is creating a dialogue with the borrower for positive sustainability outcomes. Within the loan structuring, a framework is constructed, where there are specific sustainability performance targets per KPI.
This framework measures ambition and performance, which includes a timeline for achieving objectives. Loan economic outcomes are linked to sustainability performance targets (SPTs) and the loan interest reduces where borrowers satisfy pre-determined SPTs and KPIs. Reporting outcomes and impacts are the important final step.
SLLs in action
Our goal is to enable investees and borrowers to realise their growth plans by providing flexible solutions for their capital needs. Engagement focuses on assisting our partners by leveraging our extensive sector knowledge, including material ESG factors, to support enhanced value creation.
We are committed to raising ESG standards over time within the smaller end of the UK development sector. We keep pace with policy and changing building regulations, technology, market sentiment and planning requirements - which includes net environmental gain, green buildings and the UK’s net zero strategy. We strongly believe that SLLs will emerge as a powerful instrument in this challenge.
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