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The global middle class is a dynamically growing economic force
Global markets are currently being impacted by a number of macro events including rates, commodity prices, and global events
These events are forcing markets into, effectively, a holding pattern until a clearer view of likely developments can be anticipated
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.
The global middle class is expanding. Due to this phenomenon, which transcends international borders, an economic force is gathering momentum. Downing Fund Managers created the VT Downing Global Investors Fund to unlock the investment opportunities being generated by this growing demographic.
How is the growing middle class impacting the global economy?
To put the size of the middle class into perspective, there are approximately one billion people living in G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the USA) and they are broadly all middle class. That leaves approximately six billion people living outside of the G7 and they can broadly be classed as an emerging or latent middle class.
But, what does that mean? The six billion people are gaining formalised incomes from which they pay taxes (which pay for health/education/roads etc) and get loans (leverage). This process of collateralisation and gearing creates a multiplier effect. That is each additional dollar earned itself creates multiple extra dollars of value.
Over the current decade, the G7 middle-class population is expected to grow at around 1% per annum*. The middle-class population outside G7 is expected to grow at around 6% per annum. That is middle-class growth should be six times higher within a population six times larger.
Reasons to be cheerful about the markets
On top of this background scenario, markets themselves are showing signs of optimism after 18 months or so of a bear market.
Forward interest rates have been flat this year. The 30-year US treasury rate currently stands at 3.9%. The 10-year rate stands at 3.65%
Long-term rates are higher than mid-term rates, implying expansion in the global economy
Murmurs are coming from central banks that the rate of ascent of short-term rates will slow or stop
There is mounting anecdotal evidence, seeping out as the reporting season progresses, of easing supply chain issues
Commodity markets have been flat or falling this year
In our experience, Capex industry valuations are ticking up. That includes the global semiconductor industry (which has been reporting difficult conditions) and a re-emergence of Japan on the investor radar. More often than not, internationally operating Japanese businesses are industrial enterprises. These observations imply market risk appetite is rising as markets anticipate an expanding global economy
Again, in our experience, more companies are reporting both results from recent periods and forward guidance ahead of expectations than behind
However, markets have remained flat for at least a year. This means they have derated materially. Higher profits and higher anticipated profits plus a flat share price equals a lower price per unit of profit – which is a result of higher interest rates. That combination should tickle out the value investors to join in with growth investors. This suggests that a much more dynamic market psychology can form.
Perhaps even the geopolitical counter currents are also being more positively addressed. In addition, markets seem to have worked around falling supplies of energy, food and materials by funding production elsewhere. Similarly, the energy transition away from fossil fuels has received a massive boost from the war in Ukraine.
The China/West trade friction is causing reshoring (bringing production back home) or the migration of production elsewhere. That spreads the benefit of economic engagement much more widely to the benefit of India, Indonesia and Latin America. So China’s loss becomes a multiplied gain across many other regions.
In summary
There are rapidly gathering reasons for markets to progress. I am very happy and willing to meet with any IFA’s who you feel might want to engage with this much more constructive background for their clients.
*The World's Growing Middle Class (2020-2022), Elements by Visual Capitalist, February 2022 and Developments and Forecasts of Growing Consumerism, European Commission, September 2018
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 note that past performance is not a reliable indicator of future results. Capital is at risk.
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. 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 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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