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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.
Not only are EUA prices (the carbon credit in the EU carbon compliance market for large industrials known as the EU ETS cap and trade system) at record highs since its collapse between 2011-2013, but COP26 reintroduced the carbon compliance offset markets after the previous compliance offset market, called the Clean Development Mechanism (CDM), faded away. However, the voluntary carbon markets will be impacted by the reintroduction of the compliance offset market.
Voluntary Carbon Markets allow companies to purchase carbon offset credits. These enable them to action their net zero transition strategies by financing additional projects to offset unavoidable carbon emissions during their path to net zero. The carbon offset market is gaining momentum again, mainly through the demand from corporate ESG initiatives.
The role of carbon offsets
Voluntary carbon offsets are often viewed negatively. The perception is that corporates use them as an easy way to reduce their carbon footprint without addressing their own emissions. I tend to disagree with this point of view. I think that carbon offsets can act as a catalyst for the transition to a low carbon future. Any genuine carbon reduction projects will make a difference. So, it makes sense for corporates to invest in carbon offsets whilst pursuing internal carbon reduction projects.
That’s not to say that elements of the current system are without issues. Carbon offsets can only be an effective way of reducing carbon emissions in the short term if the offsets are credible. Corporates need to be sure that the credits are not double counted as otherwise it can be perceived as carbon washing, as in the new greenwashing. For instance, how can corporates be certain that the realised carbon reduction is not double claimed (and thus double counted) i.e. by the corporate itself and by the host country of the project?
Article 6
In the so-called Paris Agreement, countries have individually agreed to what extent they will reduce their carbon emissions, also known as the Nationally Determined Contributions (NDCs). Article 6 of the Paris introduced the market mechanism for the Paris Agreement which in turn deals with the issue of double counting/double claiming (which was agreed at COP26). Article 6 has two important paragraphs:
Article 6.2 deals with countries trading emission reduction under their NDCs (this is known as Internationally Transferred Mitigation Outcome, or ITMOs). This means a country that is ahead of its NDC could ‘sell’, on a bilateral basis, part of this additional mitigation to a country that might struggle to realise its NDC.
Article 6.4: This article effectively reintroduces a carbon centralised offset market similar to the CDM for the purpose of the Paris Agreement. That is, the projects abatement will have to be registered with the UN.
A host country wishing to monetise its greenhouse gas abetment opportunity now has three options. In the first two options, it can monetise GHG abatement opportunity either as a carbon offset project under article 6.2 or 6.4., in both cases a corresponding adjustment of the host countries carbon tally. The third option is that the host country will not make a corresponding adjustment in which case the carbon offset is not genuine as the carbon reduction unit could be double counted.
The problem the voluntary market now faces is that article 6 does not include voluntary markets in the requirement for corresponding adjustments. Plausibly, article 6 means that voluntary carbon offsets without a corresponding unit are, almost by definition, double claimed or double counted.
A solution for the voluntary carbon offset market?
Arguably and potentially counterintuitively, COP26 provides a solution for the voluntary carbon offset market. Corporates voluntarily wishing to reduce their carbon footprint through carbon offsets should now tap into the compliance offset market as well and ensure that the carbon offset projects have corresponding adjustments. This will ensure them that their carbon emission reductions are genuine and not double counted.
Not only is it key for a project activity to genuinely reduce emissions, but corporates should be confident that the underlying projects are sound. They need to be certain that the counterparty is financially credible. The LSE has taken a positive step and is seeking to develop a new market solution that seeks to address these issues. The system enables funds that invest in projects producing carbon credits to list on the LSE. Having a dedicated market for voluntary carbon offsets funds can increase liquidity, but crucially, it should be accompanied by transparency. Similarly, project developers and owners need transparency about the investors, especially if they agree to long-term offtake contracts of the carbon credits. The LSE will have to ensure that all underlying carbon offset projects are part of Article 6 and have a corresponding adjustment.
At COP26, financial institutions, representing nearly $130 trillion in assets, pledged that they will try to cut the emissions from their lending and investments to net zero by 2050. These pledges are promising and could fuel the momentum in the carbon offset market. However, there are still several hurdles to be taken before funders will start to invest. At least the compliance offset market seems to be on the right track.
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