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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.
There has been a significant focus on the function and value of the AIM market for companies and investors since the Budget. While there are uncertainties ahead, we remain optimistic and view the uncertainty as an opportunity for our investors.
30 years of success across the UK economy
The numbers suggest that AIM has been a success in the 30 years since its creation. £48bn of IPO funds raised plus £39bn of follow-on funding supported almost half a million jobs and £35bn of UK GDP in 2023 alone. These numbers roughly double when accounting for the wider economic impacts on supply chains and employee spending in the economy. For the Exchequer, the contribution is also meaningful - £5.4bn of corporation tax contributions in 2023, before VAT, income tax, NIC and taxes on dividends and capital gains. It has helped businesses to grow with revenue growth of 40% in the three years post IPO, employee growth of 17%, and average profits increasing from £2m in 2010 to over £13m in 2023.
Market corrections are not unusual
Over 50% of all growth capital raised in Europe in the last five years has been on AIM. It has been the inspiration for many growth markets around the world which have served the same purpose – to help young companies grow. It is proven time and time again through scores of academic literature that junior markets do work.
So, what has happened in recent times? In our view, AIM has gone through something of a reset. During the ultra-low-rate years from the financial crisis through to the end of Covid, many AIM companies had enjoyed the benefit of cheap money which was reflected in sky-high valuations. With higher interest rates today, long-duration growth is less attractive, and valuations must decline until an equilibrium is found – a point where investors are commensurately rewarded for the equity risk they are taking. This is not a ‘market issue’. It’s a manager issue, born out of expecting the same lax financial conditions to persist forever, incentivising extraordinary risk-taking.
The poor performance of the index is largely driven by its concentration, with the largest and most widely held companies having been the most expensive before the correction. AIM’s decline is similar to how the S&P would react should the world decide that the Magnificent 7 are overvalued, mimicking the Nifty 50 crash of the early 70’s or the dotcom crash of 2000. The point here is that parts of the market become overvalued through cycles before a shock causes a reset. These corrections aren’t unusual.
Sensible and sustainable valuations
A corollary of this reset is that the number of new listings has decreased. We think this is partly due to a normalisation of ratings. Where AIM was previously viewed as an exit route at a premium multiple with significant competition for assets, the reverse has been true as managers have less capital and prefer to take fewer risks, concentrating on nurturing what they already own. However, as the market normalises, valuation expectations do the same. At that point, AIM will return to being an attractive market to list on, and at more sensible and sustainable valuations where risk and uncertainty are appropriately priced.
We believe that this has already happened, and we note from discussions within the industry significantly higher interest in listing on AIM in the first few months of 2025, despite the changes to Business Relief (BR). In many ways, while much smaller, AIM is probably a healthier market than it has been at any point in recent history. Valuations are more sensible, and the most speculative “free money” and low-quality businesses have exited the market. An improved reputation and some certainty around Business Relief may be all it takes to get the listings flywheel spinning again.
For many companies, AIM should be an attractive route to new investment by providing access to capital at a significantly lower cost than the main market. While staying private for longer remains an option, this isn’t always plain sailing. Running companies with high levels of debt is stressful when it’s not free. PE owners are notoriously challenging, and typical PE growth models struggle without cheap and easy capital evidenced by a lack of real exits and ongoing fund-to-fund recycling. In addition, any credible PE owner is now subject to similar ESG disclosure requirements as public company investors, such are the demands of their typically much larger institutional LP investors. The cost and disclosure benefits of private ownership are diminishing and for many, the presence of PE owners in the business and at board meetings can be restrictive.
Business Relief reform
Any investment needs to offer a commensurate level of return for the risk taken. The government’s announced reforms to Business Relief at the Autumn Budget last year set a backdrop of real changes coming from April 2026. Qualifying AIM shares held at the time of death will be eligible for 50% relief rather than 100% from inheritance tax (IHT) as previously afforded, resulting in an effective IHT rate of 20% - a major shift in the tax landscape.
This does make the risk vs return trade-off more difficult. Many now look at AIM returns and wonder whether the risk plus 20% tax offers sufficient benefits relative to unlisted BR. Unlisted BR generates more modest returns but retains the 100% relief below £1m invested. And other assets could potentially generate higher returns but will certainly lose 40% of their value on the investors’ death.
Mitigate against IHT and grow wealth
Our AIM Service sits right in the sweet spot. We continue to generate market leading returns – around 8% annualised since inception in 2012 – and can also offset 50% of the inheritance tax liability. The changes to BR imply that an AIM investor needs 25% capital growth to offset this liability, taking us under three years. In the case of other assets, to offset a 40% tax requires 65% capital growth and would take over six years assuming the same returns. Consider also that in a world of rising inflation, a well performing AIM service is really the only way to generate IHT mitigation and grow wealth in real terms.
We acknowledge that the UK and AIM are facing headwinds. But those headwinds are largely sentiment based, not fundamental. A core tenet of finance is that lower valuations today tend to result in higher future returns. Our own portfolio, despite outperforming, is still trading near its valuation lows and we think offers a compelling route to future capital growth.
Unique Wealth Guard cover
We sign off with a final note that Downing provides Wealth Guard on its AIM Service which returns up to 20% of losses (capped at £150,000) should the value of the net initial investment fall at the time of death. Considering the current low level of AIM, investors in our Service are therefore largely insulated from equity market risk, while also gaining from equity-like returns and 50% inheritance tax mitigation. This is a unique offering in the BR and listed equity space.
If you'd like to discuss this article in more depth, please register your details and we'll be in touch. You can find further information on Downing AIM Estate Planning Services here.
Important notice
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.
Past performance is not a reliable indicator of future returns.
This content 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. Whilst care has been taken in compiling this content, 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 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.
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