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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.
Since our last blog spotlighting the ‘picks and shovels’ opportunities in the AI and data centre boom, the markets—and particularly AI stocks—have hit a rough patch. Nvidia, the darling of AI, has slid from its recent highs, and Europe’s AI semiconductor giant, ASML, has taken a similar hit. What went wrong? Theories abound—growth fears, weak U.S. jobs data, the Japanese Yen carry trade, and geopolitical jitters. Yet, the exact trigger for this month's sharp correction remains unclear. It’s likely a combination of all these factors, mixed with high valuations, crowded trades, and the thin liquidity of summer markets.
Investor anxiety is growing as market concentration intensifies, with money piling into a small number of large-cap stocks. In a piece we wrote earlier this month, we noted that 13 of Europe’s 15 largest funds held positions in ASML, with an average weighting of 6.2%. While ASML is undoubtedly a top-tier company, there are smaller players in the AI value chain benefiting from the data explosion and well worth a closer look.
In this note, we’re diving into data centre cooling and turning the spotlight on Munters, a lesser-known Swedish company that could be a hidden gem in the rapidly growing data centre cooling landscape.
Data centre gold rush
In last month’s blog, we highlighted the exciting opportunities data centres present as the backbone of the AI revolution. It’s not just the semiconductor giants raking in the profits—equipment suppliers, HVAC (Heating, Ventilation and Air Conditioning) companies, and power providers are also set to cash in.
Despite some market jitters, the AI boom is far from cooling off. If the tech titans are to be believed, we’re only at the beginning. Sundar Pichai, CEO of Alphabet (Google’s parent company), made it very clear during a recent earnings call: “The risk of under-investing is dramatically greater than the risk of over-investing.” Alphabet’s capital spending is set to skyrocket by 50% this year, reaching a staggering $48 billion, with much of that pouring into AI-driven infrastructure—primarily data centres.
And it’s not just Alphabet. With estimates suggesting that Alphabet, Microsoft, Amazon, and Meta will collectively spend $104 billion on AI data centres this year alone, the scale of investment is enormous. Include the contributions from smaller tech firms and other industries, and the total spending spree on AI data centres from 2024 to 2027 could soar to an astonishing $1.4 trillion. The AI arms race is in full swing, and the stakes have never been higher.
Keeping AI cool
Data centres are packed with thousands of servers that need to stay cool to keep things running smoothly. In fact, a data centre’s capacity—and its profitability—depends on how effectively it cools those servers. The better the cooling, the more tightly servers can be stacked, maximizing productivity per square foot. However, cooling typically eats up around 40% of a data centre’s energy bill. And if things overheat? The cost could be massive downtime.
Over the past decade, cooling technology has made huge leaps, with most large data centres upgrading from outdated air-conditioning systems to cutting-edge solutions. But as global temperatures rise and computing power skyrockets, even the best cooling tech is facing new challenges. If data centres are struggling to stay cool now, how will they handle the next generation of AI-driven computer chips predicted to generate 5 to 10 times more heat?
This challenge is underscored by the rapid rise in data centres' rack density—a measure of the data and energy capacity of servers. The average rack density is expected to jump from 8.5 kW per rack in 2023 to 12 kW per rack in 2024. And in high-performance setups, power densities can soar to 20 to 30 kilowatts per rack (equivalent to powering three cars with some even more extreme densities emerging (+70kW). The cooling challenge is only getting hotter, and data centres must keep up to avoid getting burned.
Source: Munters Webinar - March 2024
Spotlight on Munters
Munters, a Swedish mid-cap industrial powerhouse, is making waves as a global leader in energy-efficient climate solutions. Partnering with customers in critical sectors like pharmaceuticals, agriculture, and battery production, Munters excels where humidity, temperature, and energy efficiency are paramount. But the real opportunity right now is data centres.
Munters is at the forefront of providing advanced cooling systems that are essential for keeping data centres running smoothly and efficiently. Their Data Centre Technologies division is booming, with orders skyrocketing and profitability reaching all-time highs. Management is optimistic, forecasting a 10% growth rate for the data centre cooling industry.
With tech giants and hyperscalers planning massive investments, Munters is perfectly positioned to ride this wave of demand. The data centre cooling boom is just getting started, and Munters is set to be a key player in this long-lasting surge.
Stock profiles
Munters is a global leader in climate solutions for mission-critical processes. It offers innovative, efficient and sustainable solutions for customers in industries where controlling indoor humidity, temperature and energy efficiency is mission-critical.
Risk warnings: 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 our funds should be held for the long-term and are higher risk compared to investments solely in larger, more established companies. 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.
Important notice: This content 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. This content contains information 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 this content, 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. 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: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
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