None of the information provided is investment or tax advice. You should always read the associated risks before deciding whether to invest. These can be found on the product pages as well as in our risks overview. Please confirm you have read the information above.
Downing wins ancillary contracts and discusses why flexible energy is vital in the success of a net-zero future
No items found.
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.
Supporting the solution to a net-zero future
Quite rightly, the whole world is discussing how quickly – and how – to achieve net-zero carbon emissions. We have woken up to the damage that plundering our natural resources (including coal and oil) has done to the environment and an accelerated climate crisis. Now, nations the world over are implementing renewable energy resources (including solar, wind, hydro) to power their countries, institutions, and individuals cleanly and safely to combat climate change and provide a better future for all.
The power sector is moving at a rapid pace with the transition to 100% renewable making good and steady progress in the UK and cost of deployment falling. It has also opened up a critical need for National Grid and distribution network operators (DNOs) to be able to access flexible generation to balance and maintain stability of the grid.
Over a number of years Downing LLP (“Downing”) has originated, developed and acquired a significant portfolio of renewable energy and flexible generation (flex-gen) assets. With the intermittency of the renewable portfolio and the dependability of the flex-gen portfolio, we believe that this balanced approach manages the sector risks positively and supports the industry’s most pressing needs.
The Downing Flexible Generation Portfolio
The Downing flexible generation portfolio is made up of two elements. The first is Peaking Power assets which comprises 102MW of containerised gas reciprocating engines, located in England and Wales across six sites. The second is a battery storage portfolio of two projects in the South of England with a capacity of 52MW, including the recently announced Nursling project in Southampton.
All of these assets have the potential to support the decarbonisation agenda of the government as the drive towards net-zero by 2050 gathers momentum.
As part of this transition of network responsibility, the DNOs have identified areas of constraint on their systems where the support of flexible generators is far more effective than costly network upgrades. These support contracts are referred to as DSO Flexibility contracts and represent an additional revenue to flex-gen assets, alongside their normal operations of standby supply and wholesale trading.
In February 2021, Downing exchanged contracts, via a competitive tender process, for the supply of DSO Flexibility services to Scottish and Southern Electricity Networks (“SSEN”) from its Peaking Power portfolio, adding to the existing contract with Western Power Distribution (“WPD”) in 2020. Over the past six months, these services have been called on 18 times to support the local supply networks.
The increase in distributed generation gives DNOs, such as WPD and SSEN, the ability to take on system operator functions and to make more efficient use of new technologies and existing generators that requires the DNO to take a much more active management role. This transition is referred to as a Distributed System Operator (DSO) model and supports the move from a national to a local solution.
The growth in non-dispatchable generation and reduction in thermal capacity is expected to lead to increased price volatility and greater system requirements from flexible technologies. The increase of renewable energy is targeted to grow by 60-70GW over the next 30 years.
An example of this can be seen during the UK’s most recent winter, where there has been an increase in price volatility as National Grid found challenges in managing the energy system security as weather fluctuated. The impact of this volatility of energy prices was clearly evidenced in January 2021, with prices peaking above £900/MWh on five days during the month, when there was significantly higher demand (as consumers used more electricity) and lower renewable energy (less wind than forecast), which caused significant price spikes in the wholesale market.
With regards to the future security of our electricity supply, there are annual auctions for generators to secure valuable supply contracts to support National Grid in times of a scarcity of supply as part of the Electricity Market Reform. These agreements, referred to as Capacity Market (CM) agreements, are auctioned on an annual basis and are generally for one year and 15-year terms.
The CM auction for capacity in the upcoming winter is known as T-1 in the industry. Our Nursling battery storage project won a contract at the most recent T-1 CM auction earlier this month. The auction cleared at its highest price since it commenced in 2014 at £45/KW. This high price is indicative of the current challenges facing National Grid to secure supply of energy.
Tom Williams, Head of Energy & Infrastructure at Downing, commented:
“In national efforts to combat climate change, the efficiency of the National Grid to run new initiatives for ancillary services across renewables technologies is vital, which makes the role of flex-gen assets critical in ensuring there is enough energy supply at peak times. We are delighted to have been awarded these DNO contracts for WPD and SSEN and to have won the T-1 CM auction bid for Nursling. With our impressive track record across our energy generating assets, we have the knowledge and experience to support the DNOs and National Grid optimise their operations and help keep the nation powered when it needs it the most.”
With the UK hosting the UN Climate Change Conference UK 2021 (COP26) later this year, we assume the COP26 Presidency, in partnership with Italy, and make the commitment to work with international partners “in support of a green and resilient recovery that promotes sustainable growth and jobs and delivers for those most vulnerable to the impacts of climate change.” In turn, the UK is calling on all countries to submit ambitious Nationally Determined Contributions and set out long term strategies to net zero emissions well in advance of COP26.
At Downing, we are proud to be supporting the solution to a net-zero future and while there is a long way to go, the infrastructure is in place to help it move the process along more quickly.
.jpeg)