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Why investing in renewable energy assets is a compelling option for investors seeking stability
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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.
Don't invest unless you are prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
Our recent acquisition of a portfolio of c.4,200 operational solar PV residential installations across England and Wales with its long-term (inflation linked), fixed revenue subsidies, enhances our ability to provide continued steady returns to investors.
This deal will mean on average, over the next 10 years, 56% of the portfolio’s revenues are fixed, and therefore not exposed to merchant power pricing.(1)
The Downing Estate Planning Service (DEPS) is our inheritance tax service, which gives investors the chance to benefit from Inheritance Tax (IHT) relief (subject to holding the shares for two years and at the date of death). DEPS looks to diversify a client’s subscription across multiple different sectors, which is then diversified across multiple geographies, technologies and revenue drivers.
A main sector within this portfolio is renewable energy assets, which are asset-backed and provide long-term, stable revenues.
This article explores our strategic approach to diversifying the portfolio’s revenue streams through the acquisition of renewable energy assets that are secured with fixed revenue agreements, reducing our exposure to the variable pricing of the energy market, and providing stability for investors.
Operational, fixed revenue energy assets and why they mean steady, predictable returns
Investing in energy assets means an investment in assets that are tangible, substantial and income-generating. They can be acquired when they are already operational, with fixed revenue arrangements, ensuring steady and predictable returns.
The advantages of these types of acquisitions are twofold:
Fixed revenue agreements mitigate market volatility and act as a safeguard against energy market uncertainties, and merchant power price risk, enhancing our ability to preserve capital and provide stable returns over the long term.
Operational assets are established, functioning businesses. In addition to this, years of performance data allows for accurate predictions of future energy generation.
Here is a summary of the Downing Estate Planning Service’s latest acquisition
The portfolio consists of c.4,200 solar PV residential installations across England and Wales.
This is a 13.8 MWp portfolio which is forecasted to generate a total of c.12 GWh per annum. This is enough energy to power the equivalent of c. 4,500 UK homes annually.
100% of the portfolio’s revenue is fixed.
The management of this large portfolio will be overseen by our in-house asset management team.
How can we achieve 100% fixed revenues?
The portfolio does not contain any power price risk, with its revenues 100% fixed per unit of generation. Its sole income stems from legacy Feed-in-Tariffs (“FiT”). This means that the revenue earned from these investments is linked solely to output and does not vary with changes in the energy market. These FiT subsidies remain in place until 2036/37.
Why is Downing best placed to manage portfolios of this size?
The key to managing a portfolio of this scale, that is spread across so many individuals rooftops, is to automate the flow of generation data into a centralised platform. This enables real-time monitoring of performance, improved response time, and minimised down time respectively.
At Downing, we have a dedicated in-house asset management team which has been set up to do just that. Our remote monitoring capabilities empower us to make detailed performance analysis and drive optimal performance.
In the chart below, you can see how adding these assets and actively looking for fixed revenues make a material impact on the portfolio’s revenue composition.
Figure 1. Source: Bagnall portfolio as at 31 December 2023, where revenues are forecasted, there is no guarantee these will occur.
On average over the next 10 years, 56% of the portfolio’s revenues are fixed and 51% of revenues are directly linked to inflation.
What is the impact for investors?
In a world where energy prices can be relatively volatile, stability and predictability are critical to ensure that capital preservation can be delivered. With this goal in mind, we will continue to navigate this by:
Providing stability during heightened volatility by hedging & fixing revenue;
Strategic asset acquisitions to improve revenue composition; and
Utilising long term power prices curves in valuations, so that asset value is not exposed to short term price fluctuations.
In the chart below, you can see how fluctuations and market volatility do not immediately influence the underlying value of the renewable energy portfolio within DEPS.
Conclusion
This acquisition not only expands our diverse asset base but also increases the portfolio's exposure to fixed revenue.
Our ongoing efforts to expand our portfolio's exposure to fixed revenue streams, both in the near and long term, underscore our commitment to delivering steady returns and aiming to preserve capital for our investors.
We invite you to learn more about the Downing Estate Planning Service and explore how it can align with your client’s estate planning goals, always keeping in mind the inherent risks involved in any investment.
Figure 2. Source: Energy price information provided by Energy Market Price, long term price information provided to Downing by Aurora and Baringa. 5-year data to Sept 2023. Past performance is not an indicator of future performance. The value of investments can go down as well as up and investors may not get back the full amount invested.
Risk warning
This article has been approved and issued as a financial promotion under section 21 of the Financial Services and Markets Act 2000 by Downing. 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: 6th Floor, St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
Tax treatment is dependent on the individual circumstances of each investor and may be subject to change in the future.
The rates of tax, tax benefits and allowances described are based on our interpretation of current legislation and HMRC practice. These may change from time to time and as such, are not guaranteed.
The availability of tax reliefs depends on investee companies maintaining their qualifying status.
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