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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.
Importance of good governance in driving investor returns
From September 2018, companies listed on AIM will be required to apply a recognised corporate governance code. Judith MacKenzie explains the importance of good governance and the crucial role it plays in driving investor returns.
As we await the result of the Financial Reporting Council’s overhaul of the UK Corporate Governance Code, it is worth noting that change will not just be restricted to companies listed on the main market. From September, smaller companies listed on AIM will also be required to apply a recognised corporate governance code for the first time.
However, most small and mid-sized companies are likely to find the UK Corporate Governance Code unsuitable to their size and stage of development. In fact, research indicates that around 400 companies on AIM currently refer to the Quoted Companies Alliance (QCA) Corporate Governance Code, which is specifically tailored for companies at the smaller end of the market cap spectrum. It includes 10 corporate governance principles that companies should follow, and step-by-step guidance on how to effectively apply these principles and adopt best practise. We fully support this code - it is no coincidence that companies with a strong culture of corporate governance can deliver better performance. And we welcome initiatives that drive an efficient, effective and dynamic management framework that can allow those companies to deliver long-term shareholder value.
At Downing, we expect our investee companies to apply rigorous and effective corporate governance and have directors who understand their duties and are familiar with their legal responsibilities. These can be demanding – directors are accountable for the culture, foresight and success of the company, and must act in the best interests of the company to benefit current and future shareholders.
Competent boards should be regular constructive challengers to management teams. They should also help develop strategy and long-term objectives, monitor performance, ensure the build-up of necessary assets, skills and capable management, and lead in setting a culture of integrity.
We hold significant positions in companies that have competent management, growing markets, sound and often transformational strategies, good margins, healthy operating cash flows and who appreciate the support and influence our board offers. Where key qualities are lacking, we encourage the necessary strategic action or improvement in performance. This provides confidence that over the long term, intrinsic value will become evident and our investments will either be revalued or the companies acquired.
The crucial role played by good corporate governance was demonstrated recently by one of our holdings that has been less successful in meeting the above criteria. We took a board seat, suspecting that governance could be improved, and the structure of our investment has allowed us to drive change throughout the business. Board members and top management were changed, the business refocused and we now believe that the company should generate a gain for shareholders in due course.
Correct governance of companies is critical to corporate health and investor confidence. At the core of good governance is directors actively ‘directing’, striving for the success of the company, overseen by nominated advisers who should be doing more than going through the motions, and by the LSE AIM team that should monitor with determination.
As the UK faces an uncertain future, good corporate governance will become ever more important, and will be a valuable contributing factor in creating and growing successful UK companies.
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