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Downing Fox was born - of frustration - in February 2022. Specifically my frustration – I thought there was a simple, reliable and cost-effective way of running good portfolios for financial advisers, but the industry seemed dead set on not providing it. Happily, one small corner of the industry – Downing LLP – got it and were prepared to back it. The rest is history (albeit a short one so far).
I’ve been thinking about the ‘Fox’ model for a decade. But, specifically, I created the model portfolios (Fig. 1) at the start of 2022. We’d been told we’d been hired as investment adviser to the VT Johnston Multi-Asset Funds (owned by Johnston Financial – a top-notch financial adviser in Edinburgh), and I wanted them ready for the start of April; when we were scheduled to take on both of their funds from their previous investment adviser.
I mention this because, to show our performance for the whole of 2022 - not just since April – we have to use our model portfolios, as our record running the Johnston funds only stretches back to April.
But models can be retro-fiddled. And a cynic might suggest these ones look suspiciously good. Because yes; had I sat down with a tin of crayons, an active imagination and zero morals, I probably would have doodled up an uncannily similar set of lines to those shown above.
So, for the (rightly) cynical among you; Fig. 2 and 3, show the publicly available, independently-calculated returns of the two VT Johnston funds since they were switched to the Downing Fox model. You can’t Crayola the performance of a live, managed fund containing real people’s real money. So I’m hoping to head off questions by showing how the real-money funds have mapped to our models’ performance (all charts are after charges).
I’m told that regulations require us to show a full year’s performance to accompany the charts above, so the following table sets that out. Just remember we weren’t appointed to the Johnston funds until 1 April 2022 (quite the start date!), and the process to shift them from the old portfolio to our model took a couple of weeks (hence the start date of the above charts).
2022 Total Return
Downing Fox 40% Equity Model
Downing Fox 60% Equity Model
Downing Fox 70% Equity Model
Downing Fox 80% Equity Model
Downing Fox 100% Equity Model
VT Johnston Cautious Portfolio
VT Johnston Growth Portfolio
Fully Passive Competitor 100% Equity Strategy
Fully Passive Competitor 80% Equity Strategy
IA Mixed Investment 20 to 60% Shares Sector Average
IA Mixed Investment 40 to 85% Shares Sector Average
IA Global Sector Average
Fully Passive Competitor 60% Equity Strategy
Fully Passive Competitor 40% Equity Strategy
So, this has been a long-winded way of saying that we’ve had a decent start. Over the next few pages we’ll tell you why that was.
First; which of our products can you actually buy, and where and when can you buy them?
We are currently launching fund of fund versions of our model portfolios. So that’s the 40%, 60%, 80% and 100% equity models. The fund-launch red tape is unusually thick right now (thanks, we believe, to the prior efforts of one N. Woodford). But ours are vanilla funds that do nothing funky, so it should be a matter of “when”, not “if”. Our current estimate is that they’ll be cleared for launch around the quarter end (all subject to FCA approval, please note). We plan on hoisting them onto all good platforms soon after that (with limited “founder” discounts for early-bird advisers).
But, if you really can’t wait until then, the two VT Johnston funds are available on a handful of platforms today.
Performance Review 2022
It’s a good idea to split this review in to two halves: What went right (or wrong) with our defence? And what went right (or wrong) with our attack?
It’s a good idea because ‘defence’ and ‘attack’ is how we split our portfolios up too. (Although we say ‘growth’ instead of ‘attack’ out of respect for our more delicate investors: No recourse to the smelling salts).
So our 60% equity model, for example, is permanently allocated 60% to attack, and 40% to defence. From a portfolio management perspective, it helps to separate the two, as otherwise it’s too easy to let the whole portfolio drift towards ‘attack’ when the going’s been good. But, after a prolonged rally, defence becomes increasingly important: You don’t want your defenders to have wandered up the pitch when you really need them.
We suspect that’s what held back many of our competitors last year, so ‘defence’ is a good place to start:
Our defence component is permanently switched on. By that we mean that, because we don’t try to predict when a nasty stock market sell-off will happen (basically an impossible task), we instead have a pre-allocated part of the fund always primed for that to happen today (no matter how good today starts off looking).
In our book, that rules out plenty of asset classes. Some are obvious, like untested ‘alternatives’ (crypto as a storm shelter? Really?), while we exclude others for more technical reasons. Take commercial property – a potentially good asset, but in a market panic it either becomes too illiquid or too volatile, depending on what structure you hold it in (open- or closed-ended). Or corporate bonds, which tend to act like low-beta equities in a proper meltdown (i.e. less bad than equities, but still not good).
This pickiness helped us in 2022, as almost all these assets fared poorly last year.
We also, for the record, avoid derivatives. In the right hands, these could be useful. But ours aren’t the right hands, and we’re not sure whose are the right hands either.
That leaves us with developed-market government bonds and cash as the options within our defence component, both of which have a long record of usually heading upwards in a crisis.
We emphasise “usually” because there are certain circumstances when this doesn’t happen. One of those is when government bond prices have been driven too high by an extended run of low, falling inflation, and then high inflation rides into town. Under those circumstances, government bonds can be just as risky as equities.
As 2022 began, it was no great secret that bonds faced this threat: They’d been widely derided in the industry as “return-free risks” well before then. We happened to agree with that assessment, so we didn’t hold any.
This means our defence component was all cash or cash equivalents, split 50% GBP pounds and 50% US dollars. We like US dollars because, provided they haven’t been driven up to nosebleed levels beforehand, they often rise against sterling in an emergency. And, as the year began, we thought they were reasonably priced against the pound.
In respect of the positive returns we made for our more ‘defence’-heavy models in 2022 – the year that inflation rode back into town - this positioning was the most important.
Later in the year we altered this mix as “events” unfolded. After Autumn’s Liz-and-Kwasi show we were particularly active: US dollars had moved closer to their nosebleed levels, so we reduced our defence mix down to 80-20 in favour of sterling. We also added some gilts and US treasuries, as their higher yields meant they began to offer some protection against a classic recession.
We’re still not huge fans of longer-duration bonds, so our defence component remains around two thirds exposed to cash and very short-duration bonds. Let’s see what 2023 throws at us.
The Growth Component
The Growth component is the part of the Downing Fox portfolios that should be the star of the show. It’s the bit designed to do the heavy lifting of generating high long-term returns. But, given the bleak nature of markets in 2022, it graciously stepped aside to let Defence have its moment.
Its role as the portfolio’s attacker, please note, doesn’t free it from any defensive responsibilities. It consists solely of actively-managed equity funds, run by managers who lose sleep over how their chosen companies fare in the real world: They don’t want to see their portfolio tank any more than you or I do. As such, many of its defensive qualities are baked in at the micro level.
These were evident in 2022. The Downing Fox 100% Equity model portfolio (which is the growth component plus our own charges) fell by 1.7%. We certainly wouldn’t have wished for a loss, but it showed more backbone than the average global equity fund, which dropped by 11.1% over the year.
We’ll come onto those sleep-disturbed managers and their crucial role in a moment. But first a quick note on our “top-down” positioning: We’re committed to running a portfolio that’s permanently balanced between both ‘value’ and ‘growth’, and between small-, mid- and large-sized companies.
This helped us in 2022. After ten or more years of large-cap growth stocks beating nearly everything else, global equity fund managers (and trackers) had become increasingly exposed to these companies. But their success was partly due to the same factors that had been driving bond markets higher, so they too looked vulnerable to the return of inflation (and the accompanying rise in interest rates).
So, as with our defence component, running a profile that wasn’t overly vulnerable to an inflation shock helped us compared to the peer group last year. (Note that this is different from claiming we predicted inflation would return in 2022. We didn’t, we were just open to the possibility that it might.)
Growth Component – holdings highlights
In the interests of balance, and to avoid accusations of cherry picking, I thought we’d look at our top and bottom performers (in absolute terms) for the year:
Top of our pile was Kennox Strategic Value. After a decade in the wilderness, value fund managers had become an endangered species, so finding funds to achieve our promised value-growth balance had become increasingly hard.
Thankfully, the team at Kennox defied the Darwinian cull of value funds, and we were pleased to add these experienced managers to the stable. Just in time, it turned out, as their previously unfashionable positions in energy, telecoms and gold mining companies set the trend in last year’s all-change markets.
Bottom of the pops, meanwhile, was our holding in Berenberg Europe ex-UK Focus.
If there was one job you didn’t want last year, it was being a European small- and mid-cap growth fund manager (either that or Chancellor of the Exchequer). Between the inflation and the rowdy neighbours, Europe’s small caps were right in the sour spot of the stock markets’ woes last year, and this fund felt the full force of it.
We met the manager – Matthias Born – a couple of times to discuss performance. He wasn’t enjoying the conditions, understandably, but we got no sense that he’d done anything we wouldn’t expect him to under the circumstances. He remains, in our view, a first-class manager, and we fully expect to find ourselves explaining, in future annual reviews, why his fund is top of the pile, not bottom. Particularly as European small-caps now look like bargains on a long-term outlook.
This is the Downing Fox way: If we’d have filled up with value funds, we’d have looked unbelievable this year, but poor in the few years before. But if we’d loaded up on growth, we’d have made heroic returns during the pandemic, but endured an abysmal run in 2022. We really don’t want to drag you or your clients through the mire of deep underperformance so, for us, it’s all about the balance.
On that note, let’s look at another of our tortoises from last year: TB Evenlode Global Equity Fund.
I can’t add the index to the chart, as we don’t have the licence, but I can tell you, our holding in Evenlode Global Equity was just under a percent behind the global stock market last year. This is fairly unremarkable – so why am I remarking on it?
Because it illustrates some important aspects of our process.
Firstly; we’re not trying to “time” our jumping into or out of different investment styles, such as value and growth. My experience has convinced me this is impossible to do well, and ends up costing more than it creates. So we remain permanently exposed to different investment styles that – we believe - work well over the long-term (but won’t outperform each and every year).
For this to work, and not just be a complicated and expensive way of recreating the index, we need to find the best operators of those investment styles. This means assessing loads of factors; such as the managers; their process; their charges; and the fund itself (among many other things).
At the current time, we think the TB Evenlode Global Equity Fund is one of the best proponents of the “quality-growth” style of investing (this is broadly like Warren Buffett’s approach). That includes some of the most popular, go-to funds favoured by many today.
We have cryptically re-labelled perhaps the UK’s best-known of these on Fig. 7 (if we could have added the puzzled, monocle-wearing emoji into the pseudonym we would have).
In our view, the Evenlode fund is the better fund on many measures, such as its size, its charges, and the motivation and culture of the management team (a part of which is influenced by whether or not the previously-British managers are channelling profits to the low-tax jurisdiction to which they recently relocated).
Getting this type of decision right is crucial to our performance. Good quality-growth funds will, we think, do far better than the market over the long-term, as will well-run value funds. The key is to find the funds that, when their style isn’t working, hold up well, while still excelling when it is. And we think Evenlode are making a great fist of doing exactly that.
As such, while others might be fretting over Evenlode’s slight underperformance last year, we were impressed. We’re more than happy to stick with the fund, and our other growth funds too. We can afford to wait for markets to favour their style again because, in the meantime, we have a Kennox (and a Havelock, a Snyder and a Lightman) who are well favoured today.
Downing Fox – Equity Fund Holding Performance
2022 Total Return
SVS Kennox Strategic Value
LF Lightman European
Lazard Global Equity Franchise
LF Havelock Global Select
HC Snyder US All Cap Equity Founder
BNY Mellon Global Infrastructure Income
Aikya Global Emerging Markets
DMS Latitude Global*
Vanguard Global Sustainable Equity**
CC Indian Subcontinent
Sephira Global Emerging Markets Long Only
Allianz UK Listed Opportunities
VT Castlebay UK Equity
TB Evenlode Global Equity
VT Cape Wrath Focus
CC Indian Subcontinent
LF Montanaro European Income
TB Whitman UK Small Cap Growth
Berenberg Europe ex UK Focus
*Added October 2022 **Switched out for the same strategy offered by the underlying manager (Wellington Global Stewards) December 2022.
We’ve enjoyed a good start, but it won’t always be this good. Many of our competitors were caught in “lazy-long” positions in bonds and growth-heavy portfolios, but that’s behind us now: I doubt they’ll be bitten so hard again in the very near term.
However, we’re confident that our focus on finding the best active managers, combined with not making asset allocation “timing” mistakes, will give us a decent advantage over the coming years. So that’s where our focus remains for 2023, and will do every year after that too.
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 simulated and past performance are not reliable indicators 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.
Important notice: This document is for information only and does not constitute an offer or invitation to apply for shares in the fund. Any subscription to the fund should be made on the basis of the relevant product literature available from Downing, and your attention is drawn to the charges and risk factors contained therein. Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation. Capital is at risk and investors should note that their investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Downing is authorised and regulated by the Financial Conduct Authority (Firm Registration No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
For Professional clients only.
Subject to FCA approval.
 Source: FE Analytics, 31/12/2021 to 31/12/2022. Downing Fox Model Portfolios include an annual management charge to reflect Downing’s own planned AMCs: 100% Equity Strategy = +0.5%; 80% Equity Strategy = +0.4%; 60% Equity Strategy = +0.3%; 40% Equity Strategy = +0.2%. Weightings rebalanced month end. Note, Downing performance is simulated. Any statements regarding future performance may involve known or unknown risks, uncertainties and other important factors, which could cause actual performance to differ from expected. Simulated and past performance are not reliable indicators of future performance.
 This transparency is one of many reasons why I think funds of funds are better products for advisers and their clients than model portfolio services.
 Source: FE Analytics, 14/04/2021 to 30/12/2022. Downing Fox Model Portfolios include an annual management charge to reflect Downing’s own planned AMCs: 70% Equity Strategy = +0.35%; 40% Equity Strategy = +0.2%. Weightings rebalanced month end. Note, Downing performance is simulated. Simulated and past performance are not reliable indicators of future performance.
*Previously known as the VT Johnston Multi-Asset Balanced Fund.
 Note that the two lines don’t exactly match: Some days the fund is ahead, some days the model is ahead. This is due to differences in when underlying holdings are counted in their respective prices. This washes out over the longer term.
 Source: FE Analytics, 31/12/2021 to 31/12/2022. Downing Fox Model Portfolios include an annual management charge to reflect Downing’s own planned AMCs: 100% Equity Strategy = +0.5%; 80% Equity Strategy = +0.4%; 70% Equity Strategy = +0.35%; 60% Equity Strategy = +0.3%; 40% Equity Strategy = +0.2%. Weightings rebalanced month end. Note, Downing performance is simulated. Simulated and past performance are not reliable indicators of future performance.
 Source: FE Analytics, 31/12/2021 to 31/12/2022. Downing Fox Defence and Growth component performance is simulated. Simulated and past performance are not reliable indicators of future performance.
 We also think that, in a world in which so much of what we consume is imported, holding a decent amount of the planet’s reserve currency is not a terrible idea for the average Brit. Yet most of us don’t do that.
 Source FE Analytics 31/12/2021 to 31/12/2022. Simulated and past performance are not reliable indicators of future performance.
 Source: FE Analytics 31/12/2021 to 31/12/2022. Simulated and past performance are not reliable indicators of future performance.
 Source: FE Analytics 31/12/2021 to 31/12/2022. Simulated and past performance are not reliable indicators of future performance.
 If I even whisper the name of an index discretely to my wife, let alone commit it to a written letter, the index provider will slap us with a bill for a gazillion pounds (which ultimately our fund holders will end up paying for). Thankfully, Mrs Evan-Cook is fanatically disinterested in my day job, which saves us a fortune in licencing fees.
 To borrow Warren Buffett’s golfing analogy, it was the equivalent to scoring a 4 on a very tricky par 5, rather than a 4 on an easy par 3.
 Source: FE Analytics 31/12/2021 to 31/12/2022. Downing performance is simulated. Simulated and past performance are not reliable indicators of future performance.