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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.
Albert Einstein is credited with the statement: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.” When it comes to investing in equities, I believe that the power of upward compounding will only work if two criteria are met: you are prepared to take the long view, and you select investments with high and sustainable returns on equity. There are other perfectly valid investment strategies, such as buying into turnarounds, or buying companies that are out of favour and selling them on at a higher valuation when they return to favour. These harness human intervention and shifting market or macro sentiment respectively. Compounding requires a different mindset. Patient investing is hard: financial markets encourage activity. Corporate financiers make money from deal-making; brokers make money from trading; at the start of this and every other year, sell-side analysts issue “Best Ideas” buy lists; the monthly factsheets required of fund managers exert a subtle pressure towards both short-termism and hyperactivity. The observation of 17th century mathematician Blaise Pascal is relevant here: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
Long-term compounding
I want to illustrate the power of long-term compounding by analysing two UK companies. Both are consumer-facing businesses, one domestic and one international, and both have pursued fundamentally organic growth strategies for many years. In both cases an investor would not have needed to take any view on macro-economic factors, such as the outlook for consumer spending or interest rates, to make very good returns. All that was required was, in the words of Charlie Munger, to practice “sit on your ass investing: you’re paying less to brokers, you’re listening less to nonsense…”
My first example is UK homewares retailer Dunelm. The business was founded in 1979 and listed in the UK in October 2006 with a valuation of £340m. The founding Adderley family sold some of their holding at IPO, although if you read on you may conclude that they shouldn’t have sold a share! However, the family still owns over 40% of the company, which I view favourably, as it provides stability, a positive influence on the culture, and plenty of know-how. In the 17 years since IPO, Dunelm has invested over £500m into tangible and intangible assets, doubling the store estate to 177 sites and building an online business which accounts for over £500m of revenues. It has only spent £25m on two small acquisitions, so this is a fundamentally organic growth story. By my calculations Dunelm’s return on average equity has exceeded 38% in every year since flotation. Revenues have risen roughly fourfold to over £1.5bn, and pretax profits sixfold to over £200m since IPO. All of this has been internally funded: net share count has risen by just over 1% (yes, you read that right) since listing. Charlie Munger once observed with his usual acuity that “Over the long term, it’s hard for a stock to earn a much better return than the business that underlies it.” Dunelm exemplifies this: its consistently high return on equity has driven excellent returns for shareholders. Since flotation, dividends have exceeded £850m, and a business which has repaid its public investors two-and-a-half times over is now generating over £200m annually in profit. Dunelm now has over 10% of the UK homewares market but is targeting a 15% market share and is also developing a furniture offering on top. What’s not to like?
My second example is fantasy table-top miniatures business Games Workshop. This business floated in 1994 with a valuation of about £35m and in the succeeding 28 years has grown revenues 17-fold to over £400m and pretax profits 34-fold to over £150m. It has invested over £260m in tangible and intangible assets and paid out £449m in dividends. The net share count has only risen by 13% in 28 years. Games Workshop has not made an acquisition in the last 20 years and states in its most recent interim results that “we are not planning any share buy-backs or acquisitions.” So, shareholders can reasonably expect a lot more dividends in future, and it is worth noting that the most recent dividend declaration at 130p per share is more than the entire 115p original listing price of the shares, and that in recent years the company has made five dividend declarations per year. Games Workshop had a period between 2006 and 2009 when returns on equity were weak, actually in single digits, but they have generally exceeded 20% in most other years and exceeded 50% in each of the past five years. The recent success has reflected greater monetisation of the group’s intellectual property and the success of one-man stores under a dynamic new (albeit home-grown) chief executive. The greatest rewards to shareholders so far have also come in the past five years, highlighting that patience has been advisable to maximise returns. The business has global appeal and potential, and the company clearly agrees, saying recently: “We are very confident in the Warhammer hobby, and our business model and its resilience.”
To conclude, there is a great deal of money to be made from identifying great businesses which can sustain high returns on equity and owning them for the long run. The last word goes to Charlie Munger: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”
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 note that past performance is not a reliable indicator of future results. Capital is at risk.
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.