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Demand in the UK property market, what about the supply?
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Parik Chandra
Partner and Head of Specialist Lending
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.
2021 has again seen property prices continue to increase with notable peaks in both June and September. The average price of a house in June, according to the Rightmove House Index reached a record £338,462, though at only £15 higher than the previous record set in July, it is potentially a sign that prices are now stabilising.[1]
Though prices are already high, we still expect positive growth over the next 12 months, albeit at a slower rate than we have experienced over the last year. While the end of stamp duty incentives may dampen demand for a period, interest rates remain historically low and mortgage availability remains robust. And even with the lifting of lockdown restrictions, the desire for more space amongst homeowners looks set to continue as a result of the pandemic.
As a nation, we are obsessed with home ownership and house prices, as so many of us view a house as both a home and an investment. At Downing, we take our role as responsible investors very seriously and look to help support the UK's housing needs, so as many people as possible can achieve the dream of having a home and their own asset. To make this happen, we focus on making secured loans to property developers delivering residential-led schemes nationwide. Additionally, we also provide wholesale finance solutions to fund bridging lenders in order to provide greater support to SME developers through a different funding strategy.
The wider context
From a governmental standpoint, initiatives are typically focused on the demand side of the housing market. At Downing, we would like to see more government support that looks instead at the supply side as the disparity between supply and demand continues to push up house prices. Outlined in a recent Financial Times article here, Sid Bhushan, economist at Goldman Sachs, is quoted: “One under-appreciated reason for the price boom is that housing supply is very tight. Housing inventories remain near historic lows in the US, Canada and the UK, while shortages of building materials and labour have hampered construction, “exacerbating the housing shortage”.
With the number of properties on the market not replenishing those that are being sold and the number of people looking to buy a property being 20.5% higher than the average for 2020, new housing has got to be a priority. As senior lenders, we aim to play our part in helping SME developers build mass market housing which is less subject to pricing volatility. And with new houses increasingly in demand, we see this as an important social factor for the wider economy and betterment of society. We would like to engage with the government to reform policies around planning and housing delivery in the UK.
In the House of Commons library, it states that “Governments since 2015 have pursued both supply-side and demand-side measures. There has been, and continues to be, a desire to increase home ownership, particularly amongst first-time buyers... There is an expectation that most new building will be carried out by the private sector. To this end, much Government effort to stimulate house-building has been focused on planning measures to ‘make the system more open and accessible and tackle unnecessary delays.’ Broadly, developers with planning permission are expected to use it and local authorities are expected to have an up-to-date plan in place based on an objective assessment of housing need within the area.”
We welcome all initiatives that support increasing housing supply in the UK as more homes mean prices are likely to remain stable. As lenders, we want to see a stable housing market that encourages sustainable price growth year on year and is supported by economic fundamentals, such as healthy supply and demand and a robust employment market. A volatile market with steep house price increases over short time frames will eventually lead to a more severe fall in prices and/or an imbalance in the market, which I think we can all agree should be avoided.
Increasing the supply of housing is one of our primary objectives here at Downing, and our recent deals reflect how we are driving this. These include two transactions in Birmingham - a £12 million loan towards the construction of 80 new residential apartments in the Digbeth area and an £8 million loan to support the construction of six new commercial units alongside 37 residential apartments in the Jewellery Quarter.
What’s next?
It’s likely that the real impact of the pandemic on the property market has still not been felt. As government schemes unwind and the dynamic between home working and office working continues to evolve, any structural impact on housing demand remains unknown as does the impact on the wealth of households, incomes and interest rates. With the private sector and companies such as Downing being an important driver for stimulating the construction of new homes, it’s our hope that the government will announce new initiatives to support this without excessive red tape to hinder the process. This should help create a more stable housing market that benefits everyone in the future.
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