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Rosemary Banyard featured in Investment Week discussing UK equities
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Downing
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.
After a roller coaster year in the UK equity market in 2020, investors and commentators are looking forward to better news in 2021 as several Covid-19 vaccines are rolled out and Brexit is seen as done and dusted. The pundits are predicting a period of reflation, talking up commodities and banks, which tend to benefit from rising interest rates, while anticipating a recovery in the hard-hit leisure, travel and retail sectors. This optimism seems to ignore many uncomfortable realities. We are currently in the eye of the storm as regards hospitalisations and deaths from Covid. There is a massive backlog of routine operations with hospital waiting lists now said to number over 4.5 million people. The huge government programmes to subsidise the wages of furloughed employees have saddled the UK government with debts at levels not seen since the second world war. Many businesses have disappeared and those that have barely survived thus far may find they are unable to finance an upturn. Long term unemployment and retraining will also be costly. Shopping habits and working practices have likely changed permanently, with implications for real estate usage and values. Of course we are all itching to go on that longed-for holiday, to eat out again and enjoy favourite leisure pursuits, but what then?
Many businesses have handled 2020 well and some have positively thrived. Pure online retailers, computer games publishers, and diagnostic test kit providers have been particular winners. More generally though, the strong have got stronger, leaner, fitter. The aftermath of the Global Financial Crisis in 2008 taught us that beyond a relief rally lasting only a few months, the secret of wealth creation over the next decade lay in investing in businesses with strong finances, expanding markets and secular growth opportunities, and the ability to withstand competition through the possession of sustainable barriers to entry.
The UK stockmarket offers many such attractive combinations of growth and sustainability. In the domestic arena, one example is the long term trend for individuals having to take greater responsibility for their own retirement savings following the phasing out of defined benefit pension schemes. This need is addressed by several listed branded investment platforms which possess network effects as they scale and which also benefit from customer inertia and satisfaction inhibiting switching to alternative providers. Another trend is the digitalisation of UK government services to citizens which understandably tends to favour suppliers with previous referenceable experience and trusted reputations for delivery. The growth in online and hybrid retailing is most profitably addressed by having a well-known brand and a national network of (preferably low cost) click & collect locations.
Looking more globally, there is an increasing demand for safe water and the capability for the purification of water supplies usually comes with regulatory approvals from government agencies. The same is true of the rising need for more effective and environmentally friendly sterilisation of hospitals and hospital equipment. The rising cost of healthcare requires better data and information systems to discover best practice, which can then be rolled out for greater efficiency and effectiveness. Here, incumbent hospital software providers have the competitive advantage of historic data sets and high switching costs. The rising need for cybersecurity advice in an increasingly digital age often demands the employment of highly technical talent under a substantial corporate umbrella which holds a record of previous success. The rising incidence of political instability even in democracies is likely to require greater individual protection for first responders such as the police, to the benefit of defence groups with patented protective clothing. Rising global awareness of Chinese ambitions to control the South China Sea generates investment in naval and unmanned aerial capabilities in the region to the benefit of established defence suppliers with patented products or government approvals.
Finally it is important to note that many of these combinations of secular growth and barriers to entry are often found lower down the size spectrum where a company has the opportunity to dominate a specific niche. The easiest way to identify such businesses is to analyse the returns on capital employed, or the ungeared returns on equity capital. The stock market focusses on earnings per share, and generally looks out only a couple of years. However, not all earnings are created equal. Earnings should not be looked at in isolation but in relation to the capital employed to achieve them. Superior returns on capital are a strong indicator of enduring competitive advantage, particularly if sustained over many years. If a high proportion of those returns can be reinvested in the business at similarly attractive returns, rather than distributed, so much the better. As Albert Einstein reportedly said: “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”
Originally published in Investment Week 1 February 2021.
Risk warning: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. Please note target returns are not guaranteed. Investments in this fund should be held for the long term and are higher risk compared to investments solely in larger, more established companies. Values may be affected by fluctuations in currency exchange rates and may cause the value of your investment to go up and down. Diversification may not be achieved and investments may be in the same sector. 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.
Important notice: This document is intended for retail investors and their advisers is for information purposes only. It 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 LLP is authorised and regulated by the Financial Conduct Authority (FRN: 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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