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Downing Fund Managers: building towards critical mass with new breed of funds
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Downing
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.
“Growing slowly from a small base, as you look back at many fund managers' track records, that's when you can tend to outperform,” says Downing partner Judith MacKenzie
When investment funds are in their early stages many big institutions can be reluctant to invest – but shrewd private investors know that getting into a fund in the first few years is not only exciting but also can be very rewarding.
Downing Fund Managers (DFM), the asset management arm of Downing, has five funds and most of them are still in their early years.
The VT Downing Unique Opportunities fund, run by Rosemary Banyard, was launched in the very teeth of the coronavirus crisis and has delivered a cumulative performance of 66% since launch and a 48% discrete one-year performance to the end of April. Banyard, a former Schroders manager, was awarded a AAA rating by Citywire earlier in 2021 and a four-diamond rating from Defaqto.
Both managers were brought under the DFM roof by Downing partner Judith MacKenzie, who heads up the asset management business.
“The hard yards are when you have to launch a fund with minimal FUM [funds under management], and get it off the blocks to over £50 million. And we're making great progress towards that with all of our mandates now,” she says.
“Rosemary and Anthony’s funds started with very little seed capital and therefore getting to that position without a three-year track record is no mean feat – so we're pretty confident about these funds, which is reflective of the quality of the managers.”
She says there's a perception from some institutions that a small fund can be a negative – “but frankly some investors who are quite savvy know that Rosemary's got a great track record from Schroders, and Anthony's offering something different.”
The third of the new breed is the VT Downing European Unconstrained Income Fund, which was launched under managers Mike Clements and Pras Jeyanandhan in November.
The new funds are beginning to build good track records and, importantly, says MacKenzie are indicative of the boutique strategy she is deploying.
This gives DFM a lot more flexibility than larger rivals and this is something MacKenzie is spreading to the management structure of each fund.
“We really want managers with skin in the game, and that's not just in their own fund,” she says.
“What we're doing is creating an ownership structure for each one of the funds, so the manager has a profit share and ownership of that mandate alongside Downing.
“That’s not something you’re really going to get from one of the larger houses.”
With managers having been given ownership of their funds makes very few other demands, meaning the only pressure is to deliver a good fund performance.
There are themes that run through the funds however, though they are more to do with the personality of the managers that MacKenzie has hired – “they’ve got to be people we would want to go to the pub with to gossip about the market.”
A contrarian approach is fairly consistent across the funds and most of the managers pursue bottom-up investment processes, focusing on the fundamental attractions of an investment, and aim to keep highly concentrated portfolios of 20 to 40 companies.
Eaton’s global fund is the outlier on the last two accounts, offering more of a thematic approach and a portfolio of closer to 200 companies.
“One thing that runs across all the funds is that the managers are not being put under pressure to grow assets quickly.
“We can actually structure their fund size to what the best thing is for that mandate – and we're not going to ever put pressure on them to go beyond that. That's when performance can sometimes be compromised,” says MacKenzie.
“Growing slowly from a small base, as you look back at many fund managers' track records, that's when you can tend to outperform – not when you've got £5bn sitting nagging at them all the time.”
“So while some people view being small as a turn off; others see it as an opportunity.”
She herself also runs the Downing Strategic Micro-Cap Investment Trust (LON:DSM), which at four years old is also pretty young.
Having been focused on what was an unloved area of UK micro caps during the run-up to Brexit, the trust has started to become more appreciated over the past year with the revival of interest in companies on these shores and as its value investment style becomes more popular again. It has delivered NAV growth of 26% over the past 12 months.
The fifth and the oldest fund in the range, at 10 years, is the VT Downing Monthly Income fund, though Josh McCathie only took over as lead manager in April this year, having been co-manager for the last 2.5 years. The fund has delivered 27.5% growth over the past 12 months.
MacKenzie plans to add more funds but will be careful in not going too fast.
“I want to prove that we can get to a decent size of FUM with these mandates before being distracted and going off and doing another five or 10 of them.”
“I think we've got a really good prospect of getting these funds to critical mass in the short term, and with the benefit of now having the one year track records I'm pretty sure that we can get to the target fund sizes that these managers aspire to.”
Risk warning: 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 and are higher risk compared to investments solely in larger, more established companies. Diversification may not be achieved and investments may be in the same sector. 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.
Important notice: This informaiton is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 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 authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.
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