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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.
"Whatever the market weather, quick decisions and the efficient delivery of property finance are hugely important to brokers and their developer clients," says Parik Chandra, Head of Downing Property Finance.
Earlier this year, we attended the annual MIPIM conference in Cannes. While the weather left a lot to be desired (it poured the entire week), we did learn a lot from brokers about what their priorities are in today’s development finance market.
The usual always applies – lower rates, higher leverage – but what really came across loud and clear was how much deliverability matters.
Lenders will claim across the board that they deliver fast, efficiently underwritten, finance. Many undoubtedly do. But there’s considerable variation between lenders about what that deliverability means when the chips are down.
Getting deals over the line
For brokers and their clients, getting a deal over the line is the ultimate goal, but there’s no point getting a deal done if the terms don’t stack up. And this is where the market is increasingly seeing hold-ups, frustration and even deals collapsing after weeks of work.
Brokers tend to know where to go to get terms that stack up for their clients – one lender might be the go-to on higher levered loans at a slightly higher rate, with more conditions attached. Another may offer certainty with a rate that reflects that.
Experience will tell brokers where to take each deal, but it’s also worth understanding what drives lenders in their appetite for certain types of business.
Funding can make the difference
It comes down to how lenders are funded – how a lender's own capital stack is structured matters not just for pricing and criteria, but crucially when it comes to deliverability.
There is a lot of money looking for a home in residential property development debt in the UK at the moment. Large retail banks, investment banks, institutional investors and private equity funds are all interested in gaining some exposure to residential development debt – it’s a decent hedge against equity volatility and provides an asset-backed income uncorrelated to bond markets.
How a lender's funding lines are provided are dictated by the investor’s needs, appetites and the covenants that exist within their own governance. Where an investor wants safety, rates will be lower, criteria less flexible and gearing less adventurous. For investors more interested in higher returns, loan terms will go further up the risk curve.
This deals with the cost side of a deal, but the real factor that takes that deal over the line is how much autonomy the funder gives the originating lender to make underwriting judgements and whether they manage any discretionary capital.
This deals with the cost side of a deal, but the real factor that takes that deal over the line is how much autonomy the funder gives the originating lender to make underwriting judgements and whether they manage any discretionary capital.
In the short-term finance sector, bridging loans typically turn over in around six to twelve months. Refurb work is usually seen as lower risk than ground up development and the lending decision will more likely fall to pricing for that risk.
But as the industry knows, this market is a pretty fixed size. Over the past five to 10 years, investor appetite to fund residential property debt in this way has outgrown the natural size of the short-term market.
This has seen a bleed of funding lines over to the development finance market in the small to mid-sized development tier.
All property finance is not the same
Bridging and development finance have long been thrown together in the same breath, but as those who specialise in the latter, they’re far from the same thing. Underwriting decisions are necessarily much more involved than for a more straightforward bridging loan. Borrower experience, relationships and leverage are absolutely key – loan sizes are often much bigger.
This has created some tension for specialist lenders, many of which have focused on bridging but recently extended into development on the assumption that these loans can be made on a similar basis. The funding lines and investor appetite is there, but increasingly we are seeing investors become much more involved in underwriting decisions – and it’s largely where originating lenders are less experienced in pure development finance.
Not only does this additional layer of diligence add significantly to the time it takes to complete a deal, it also more often than not results in the final terms bearing little relation to those initially offered in principle.
In development, changing the commercials of a deal in the middle of an application can kill it overnight. These loans are longer term, often up to three years and there is less wriggle room to dither on terms until the last moment.
This type of behaviour is getting more frequent according to the brokers we speak to – lenders that assume development is a straightforward extension of bridging are stumbling at the final hurdle. Investors aren’t happy and criteria becomes even more restrictive and pricing higher.
There is certainty in autonomy
For developers, and consequently their brokers, this means working with a lender that has the autonomy to underwrite without having to defer every decision to an investor and gives them on deliverability.
Delivering on the terms expected in the time agreed as is as important as headline rates and fees.
For more information on Downing’s straightforward funding solutions please get in touch.
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