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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.
Following the success of the UK’s rapid vaccine rollout and the potential for a strong economic recovery as the country emerged from lockdown, the UK smaller companies sector was positioned as one of the most attractive markets for investment across the globe through H1 2021.
The Alternative Investment Market (AIM) is currently home to over 800 small UK based companies with a combined value of more than £150 billion.* We believe the AIM market is hot right now, offering some great investment opportunities.
Smaller companies are often undervalued, can offer attractive returns, and have the potential to outperform larger companies over time.
Room for substantial growth
By smaller companies we generally mean companies with a market capitalisation up to £500 million. These businesses are large enough to be established, but small enough to have considerable room to grow and generate big gains - with the flip side being greater volatility.
Downing Fund Managers (DFM) focus on AIM listed companies which, by function of their size, can grow their earnings faster than larger businesses. Over the long-term, a company’s growth in earnings is the key factor behind the performance of its share price.
Since AIM’s inception in 1995, over 1,600 companies have raised over £125 billion of initial and ongoing funding to support their growth.* And while there’s no doubt smaller companies carry more risk than those listed on the FTSE 100, they also have more potential for significant growth.
Hidden gems at lower prices
To help manage risk and drive strong returns for investors, DFM use a ‘private equity’ approach to investing in the shares of publicly listed companies. This means conducting extensive ‘in-house’ research and deep-dive due diligence before deciding to invest and, once invested, using their expertise to help management teams to succeed.
Large companies have many investment analysts looking at their every move and their shares are traded regularly and in high volumes. In contrast, smaller companies tend to be under-researched and therefore misunderstood by the market so can often offer investment opportunities where the market price of a company is less than its fundamental value.
This makes the smaller companies market ripe with opportunities. DFM aims to take advantage of this by using a rigorous due diligence processes, rather than relying on third-party research, to drive investment decisions.
By buying shares at a relatively cheap price and engaging positively with management to add value, the goal is to increase the price of a company’s shares over time and reap rewards for investors.
Potential outperformance
Over a medium-long term investment horizon, the combination of these two factors – higher growth potential and favourable pricing – can create the conditions for improved investor returns and aims to lower investment risk.
There is strong evidence that smaller companies tend to outperform larger ones over time.
In the past five years, the AIM All-Share Index has increased by 63% compared to the FTSE 100 Index, which has increased by c.5% over the same period.**
But, of course, with smaller size comes higher risk. In particular, you may not get back the full amount you invest. In addition, past performance is not a guide to future performance.
If you would like more information on the AIM products we offer, please get in touch at sales@downing.co.uk.
* London Stock Exchange (August 2021) ** Five years to 7 August 2021 (London Stock Exchange)
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