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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.
A closer look at what’s creating this pressure reveals why the threat to our energy infrastructure isn’t merely something that will arise during exceptional weather or in the distant future.
Many of the facilities used to produce traditional forms of energy are scheduled to turn off, like coal, or are in need of repair or replacement, with the timeline of replacement not keeping up with demand. This has contributed to an increase in the UK’s energy imports from Europe in recent years, a trend which is expected to continue.
The growing cost-effectiveness of renewable energy has helped counter some of the potential issues around imports and is also helping the UK make the necessary move from gas and coal.
Such is its popularity that close to a third of all power generated in the UK is now produced by renewable sources. This has undoubtedly changed the face of the UK energy market to a cleaner system, but it also brings its own challenges.
On any given day you can’t simply turn on the sun or the wind as and when required. This means that there are much greater fluctuations in energy generation, which current infrastructure just isn’t designed to support. The result is that it becomes very difficult for the grid and other network operators to manage supply and demand.
One answer to managing these fluctuations, and ultimately lessen the impact of an impending energy crisis, could be to balance this volatility with reserve power such as gas engines or battery storage.
How does reserve power work?
We believe the development of reserve power is much-needed in the UK energy market.
But it remains an unfamiliar concept to most people, despite the fact that some of the underlying technology is already fairly old.
Reserve power is the process of timing energy supply, so it can be used during periods of peak demand. Battery storage and peak plants are the two main ways of doing this.
You may be slightly more familiar with battery storage – Tesla built the world’s largest battery in Australia last year -which operates by charging up on energy during periods of low demand, allowing energy to be used when needed.
The ongoing development of technology has allowed battery prices to come down, and consequently, investment in batteries as a component of our energy infrastructure is decisively increasing.
Peaking plants, which have existed in some form for a considerable time already, work by converting gas into electricity via gas-fired turbines. The plants tend to only operate for a short time during high demand, such as cold winter evenings, hence the name ’peaking plant’. Companies that own and operate these ‘peakers’ can receive income from National Grid contracts and/or trade the electricity they generate when demand, and therefore prices, are higher.
Investing in reserve power
The UK’s energy market is already heavily dominated by a small number of very large companies. It’s easy to imagine that these same players could dominate the reserve power market, too, leaving small-scale investors very little in the way of investment opportunities.
The reality, however, is that the big energy companies are focused on better serving their supply customers, leaving investment into peak plant and generation assets to the rest of the market. Furthermore, the UK’s reserve power market has shifted to having distributed generation where we can generate power closer to the point of consumption. These smaller grids can only manage smaller power plants, requiring peaking plants and batteries to be installed in areas of need.
The emphasis on smaller projects opens reserve power to a wider pool of potential investors, with investment firms such as Downing providing funding for both peaking plants and battery storage.
For example, Downing is providing an investment in the initial stage of a £1.6 billion world-first network of transmission network connected batteries. Each site will supply electricity to charging stations for rapid electric vehicle (EV) across the UK. The installed batteries will also be capable of storing enough power to supply 235,000 average homes for a day (source: Pivot Power).
We believe reserve power is undoubtedly going to be an important part of keeping our energy system working, not only enabling the continuing use of renewable energy sources but providing the crucial capability to balance the network at times of volatility. Provided investors look carefully at any underlying risk of an individual project and are confident that it’s suitable for their financial circumstances, the need for reserve power both now and in the future can present an interesting investment opportunity.
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