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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.
A recent report by the Quoted Companies Alliance (QCA) found that the average UK public company annual report now exceeds JRR Tolkien’s masterpiece The Hobbit in its word count.
The rise of report bloat
At 98,000 words, this has seen a 31% increase in five years, or roughly seven pages being added each and every year to the average set of accounts. Worse still is the data for the London Stock Exchange main market, at 101,000 words and representing a 40% increase over five years. Nor should we be complacent about the Alternative Investment Market (AIM), with an average of 42,000 words and a 23% increase in five years, since AIM companies are generally smaller and less able to afford the work involved.
What investors really value
As a regular reader of company accounts, the QCA report has led me to reflect upon the purposes of the narrative element in reports and to ask myself what I find most useful and what I consider a waste of time. As a long-term investor, I want to understand the strategy of a company and its investment priorities, so the Strategic Report is important to me. I find the discussion on priorities for the year ahead helpful in understanding the direction of travel. In a recent example, IT services and software group Kainos mentioned in the small print that a priority for FY26 in their successful Workday Products software division is “to consider the development of products for other platforms or extend our existing products to other platforms”. This seems to indicate that future software modules may be designed not just for Workday, but also for SAP SE and Oracle users, which could significantly increase Kainos’ total addressable market in its highest margin division. That is valuable information.
Another area of accounts that I find useful to glance through is what the board has been focusing on in the past year, which sits in the Corporate Governance report. My favourite example here is from the 2019 annual report and accounts of defence company Chemring. The report said that the board had “reviewed the bid defence strategy for the group”. That made me sit up when I read it! Clearly the board thought it was vulnerable to a bid therefore it was likely the shares were too cheap. So it turned out! The report was published in December 2019 when Chemring’s share price was around 240p. Today the shares are more than double this level, admittedly with a bit of help from Mr. Putin. In February this year, Sky News reported a bid approach for Chemring from Bain Capital at 390p which thankfully appears to have gone away.
Where reports go wrong
Many other areas of annual reports are less useful to me as an investor and could easily be eliminated or reduced. Here are a few suggestions: The Corporate Governance Report tells us the roles of different members of the board. I doubt that most people need to be told every single year what the job of the Chair, the Chief Executive, the Chief Financial Officer or the Non-Executive Directors is! We already know what they do. Another requirement that I find tedious and do not read is the Section 172 statement about how the directors have performed their duties in regard to various stakeholders. I realise this is a legal requirement, but it adds nothing to me as an investor. Presumably, if a company does not treat staff well, eventually that will become obvious in high staff turnover, or if it does not treat customers well, it will become clear in its sales performance. Those are more useful metrics than bland statements. I also think that all the policies that companies now have to evidence should just be available on their website, where they can be updated when needed.
The QCA report helpfully suggests two areas where there could be material reductions in company reporting: Remuneration and Environment Social and Governance. I agree with the sentiment, but these are huge topics in their own right. On remuneration, as an equity investor I am chiefly interested in the alignment of my interests with those of the directors. Ideally this comes through significant share ownership on their part (skin in the game). This means that director shareholdings and changes over time are important metrics for me. Absent significant holdings, my focus is on the remuneration package, on which I will vote, particularly any long-term incentives, and the degree to which they are linked to stretching financial targets that are hard to manipulate. As Charlie Munger so eloquently stated:
‘show me the incentive and I will show you the outcome’.
Brevity as a competitive advantage
One of the best annual reports I have come across as an investor is Games Workshop, the producer of fantasy miniatures and now a FTSE 100 company. It is a singular business with an equally distinctive annual report. The report is and always has been published entirely in black and white, with no photographs at all. This speaks to me of a lack of ego on the part of the directors, and a cost-consciousness on the part of the company, which I like to see. The narrative is very focused on strategy and operations, with a lot of useful data which has been consistently provided over the years. This includes a detailed breakdown of capital expenditure, data on store openings and closures, the number of active users of their app and the number of premium subscribers to Warhammer Plus. The latest 23/24 Games Workshop accounts run to 93 pages of which 41 are the numbers, and 52 the narrative element. This is exemplary brevity, compared with the average FTSE100 annual report at 262 pages in 2023. Only two FTSE100 companies in 2023 had annual reports running to less than 150 pages! It is noteworthy that Games Workshop, while producing one of the briefest report and accounts in the LSE main list, has also delivered one of the best long-term performances for shareholders.
If shorter reports give investors what they really need, why are we still writing novels? Discuss.
Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment advice.
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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