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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.
The “dullness dividend” is the term the City coined on the back of the relative calm since the appointment of Rishi Sunak as UK Prime Minister, and Jeremy Hunt as Chancellor. Consensus is that markets are taking comfort that fiscal prudence and philosophical discipline has been restored at the top of the UK’s ruling elite. There is evidence of this dullness dividend with long-term government borrowing rates back to similar levels seen prior to the notorious ‘mini budget’, despite base rates having continually risen since as the BoE continues its battle against inflation.
On this basis, one could argue that this makes the UK an attractive place to do business – without opening the can of worms around Brexit. Thanks to the dullness dividend there is greater confidence that the status quo will be maintained and there will be no more self-inflicted shocks to the system. Uncertainty is the greatest headwind to capital investment and business activity, and the dullness dividend goes some way to smoothing these fears.
UK is trading on a steep discount
Despite relative calmness being restored, we are yet to see this reflected in the valuation of UK assets. The FTSE 250, often viewed as the barometer of domestic UK, currently trades on a forward price to earnings ratio of 10.7x. This is a steep discount to its 10-year average of 18.6x, and not far off its cheapest in 2008 of c.8x. Whilst we can debate how bad or good things may be, it doesn’t feel like we are quite in the meltdown of modern finance and capitalism that we may have felt we faced back then.
Small businesses can thrive – despite the headwinds
This brings us to the sources of shareholder returns, which are earnings growth, the multiple applied to those earnings and dividends received. It appears the risks of multiple expansion rather than compression are somewhat skewed to favour expansion for UK companies. Earnings growth is a little more subjective at the headline level in the current climate. As active small cap managers, we would argue there is always the opportunity to find companies that can grow earnings in a given economic environment. However, parking the earnings discussion, this leaves dividends. The dullest part of the shareholder return equation; pocketing an attractive dividend distribution, doesn’t get the heart pumping as much as accelerated earnings forecasts or watching an ever-expanding multiple of those earnings. Nonetheless, if we look over the longer term, dividends have been a vital part of shareholder returns.
The impact of dividends for shareholders
Since 1970, dividends have contributed 34% of the cumulative returns, and that’s excluding any impacts from compounding. This far outstrips the 14% contributed from multiple expansion which was largely attributed to the last decade and the ultra-low interest rate environment. We are currently experiencing a sharp move away from that globally, the consequence being multiple expansion transitioning into multiple compression, especially for those companies offering dazzling shareholder returns in years or decades time. Given earnings growth can be ferociously debated on its likely contribution in the short-term, it may be playing as a side act to dividend distributions doing most of the heavy lifting for shareholder returns.
Jam today…
We believe investors will need to switch mindsets to “jam today, not tomorrow” which is a complete reversal of that needed to prosper over the last decade. This means focusing on businesses that generate meaningful cashflows today that support dividend distributions, rather than those promising enticing cashflows in the future that are more vulnerable to increasing discount rates.
The small cap opportunity
Investors have traditionally turned to large caps or specifically UK large caps for dividend exposure. However, there are currently over 300 companies in the UK small & mid-cap space offering a 2+% yield. This is more companies than offered by the FTSE 100, S&P 500 or the Euro STOXX. Hence, this should provide a rich hunting ground for dividend seeking investors, particularly since on average it sits at a 25% discount to the above large cap indices.
Regardless, history shows that the index returns of the S&P 500 and Euro STOXX have vastly eclipsed the returns generated in the UK. This is true, but this only captures the earnings and multiple parts of the total shareholder return equation. Include dividends and the FTSE Small Cap and FTSE 250 have notched up 549% and 746% respectively over the last 20 years. This compares to 367% for the Euro STOXX and 514% for the S&P 500.
The widest pool of opportunity
All things considered, it feels like the UK is a good place to invest, especially relative to its own recent history. Yet regardless of ones view on the UK, investors in UK assets are being adequately rewarded based on the valuations they have to pay. The new economic environment suggests that dividends will carve out a larger part of shareholder returns, and the UK small-cap markets appear to offer the widest pool of opportunity to invest in dividend paying companies. This should allow active managers in a wider universe to be able to deliver a portfolio of companies that are best positioned to grow earnings in whichever macro-economic environment we face, even if there is relative calm for now.
Dividends might be rather dull, but as we have seen in UK politics, dullness can sometimes pay dividends.
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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