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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.
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Downing Strategic Micro-Cap. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
While markets have reawakened to the opportunity in value stocks, at the smaller end of the market capitalisation spectrum the managers of Downing Strategic Micro-Cap believe there is untapped potential…
The world of investing has been turned on its head over the last 18 months. Despite many declaring that the growth vs. value debate was over, decade-old orthodoxies about the indomitable strength of growth companies came apart as inflation plunged revenue forecasts downwards.
Companies previously trading at valuations of 40-50x earnings have seen dramatic deratings, and fund returns have tumbled as a result. But, while 2022 was not a vintage year for any group of fund managers, some investors fared better than others.
While there is no straightforward categorisation of growth vs. value stocks, looking at the MSCI World indices provides some useful insight. Over the course of 2022, the MSCI World Value Index outperformed its Growth counterpart by some 23%. Although this outperformance has begun to close the gap between the two, their valuations remain significantly off their long-term means, suggesting that the value resurgence may not have run its course.
Regardless of outlook, this medium-term trend has demonstrated the value of maintaining some style factor diversification, and investors have taken heed – according to Morningstar, US ETF investors allocated more than three times as much to large-value funds than their growth peers in 2022.
Despite the relative favourability of value in 2022, one area of the value universe remains underappreciated. Small-cap value is often particularly underrepresented in portfolios. This is not especially new; despite smaller companies outperforming their larger peers over the long term, retail investors have tended to shy away from the sector. However, with key information inefficiencies at play, and the potential for M&A in an environment where larger companies struggle to produce organic growth, the sector is worth considering.
When contemplating a smaller companies investment, discernment is key. The sector can host the kind of growthy early-stage disruptors that flounder in a market when cash is less free-flowing. Some smaller businesses are also more exposed to a recession, with poor balance sheets meaning there is little cushioning against falling revenues. To identify which companies are genuinely underappreciated by the market, the managers of Downing Strategic Micro-Cap (DSM) apply a carefully considered lens.
The trust’s lead manager, Judith Mackenzie, and her co-manager, Nick Hawthorn, look for companies at the smallest end of the capitalisation spectrum, where little to no analyst coverage exists. They typically seek out businesses that have encountered a problem (real or overplayed) that can be rectified or overcome over time. The valuations these companies sit on will usually only reflect their downside potential, without realising the significant upside potential on the other side.
Judith and Nick are confident in the possibility of an upward rerating for their investee companies as they typically have healthy balance sheets and a clear strategic direction. Their resilience was already tested through the COVID-19 pandemic and, as many have recently refinanced, the managers believe that they are well-positioned for the rising rate, inflationary environment we find ourselves in.
The other aspect of micro-cap value investing that differentiates it from large-cap or even mid-cap value is that companies typically have a much smaller shareholder base, meaning that shareholders with a larger holding can be influential in the kind of decision making which can fuel a rerating over time. Downing has deep experience in small-cap private equity and venture capital, meaning the managers and the business are equipped with the skills and knowledge to identify and effect change. With a 5-7 year investment horizon, Judith and Nick are willing to wait to see value come through.
Together, the trust’s focus on valuations and on the smallest listed companies in the UK means that it is highly differentiated from its AIC Smaller Companies sector peers – and from the equity exposure of most investors. As such, it offers clear diversification against the typical equity allocation in UK portfolios.
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 and are higher risk compared to investments solely in larger, more established companies.
Important notice: This content is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 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. This document contains information and analysis 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 the content of this document, 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 authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
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