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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.
In November 2020 Downing Fund Managers added a new fund to its specialist line-up, launching the VT Downing European Unconstrained Income Fund.
Managed by Mike Clements and Pras Jeyanandhan (formerly of Syz Asset Management), the fund follows a similar approach to that used on the Oyster European range of funds, which they had joint-managed over the previous five years.
We talked to Mike and Pras about what unconstrained means and investing under the radar, but opened with why Europe is home to good income-producing companies.
An untapped opportunity
With interest rates at all-time lows, investors are finding it hard to secure decent returns and may need to widen their search to find consistent, high-quality income. Can European equities help plug this gap?
“In 2019, European (ex UK) companies paid out approximately £189 billion in dividends, which is almost two-and-a-half times the amount distributed by their UK peers,” says Pras. “Despite this, investors remain underweight in Europe, which is why we see the sector as a huge untapped opportunity.”
Pras notes that a number of leading global dividend payers are European, with Nestlé currently topping the ranks worldwide. “Not only are there quality companies in the large-cap space, there are strong small and mid-cap income producers that many UK investors are not getting exposure to.
“Europe has changed structurally over the last decade, shifting away from ‘old economy’ exposure towards being more of a growth region,” Pras continues. “With this fund we are trying to offer a solution that allows UK investors to diversify their portfolio, giving them something different.”
Unconstrained investing
With an ‘active share ratio’** in excess of 90%, the make-up of the fund looks very different to the European benchmarks. And due to its ‘all-cap’ approach, it also has very little overlap with other funds in its peer group.
“Our fund is about identifying different sources of alpha (returns that beat the index) and different ideas for the portfolio,” Mike says. “We construct a portfolio of high-quality, undervalued companies across a range of industries not typically included in large-cap dividend paying sectors.”
This ‘unconstrained’ method mirrors that used by the managers in their previous fund and it’s one Mike has adopted for over a decade. It boils down to looking for two types of companies across all market capitalisations: ‘contrarian opportunities’ and businesses operating ‘under the radar’.
“Contrarian opportunities involve well-known companies that operate in a sector or country that, for one reason or another, the market has fallen out of love with,” Mike explains. “As longterm investors, we have a behavioural edge because we have the confidence and patience to hold positions for the time it takes an investment thesis to play out.”
With roughly 2,000 stocks to choose from and the ability to invest up and down the market cap spectrum, Mike says the fund can access stocks unfamiliar to many UK investors. “This is what we call ‘under the radar’ stocks and it’s where we think we have an informational edge, simply because we can do extensive inhouse research.”
* This isn’t a constraint of the fund
**This measures the % the fund’s portfolio differs from the benchmark index
The perfect fit
According to Mike, Downing’s venture capital and micro-cap ethos are what drew him to join the boutique investment manager.
“When Downing invest in a company, they treat it as if they are the owners of the business, which is exactly what we do - just in the public equity space. We do in-depth, fundamental, bottomup research on a company before we bring it into the portfolio. That way, we end up with a relatively compact portfolio of around 30-40 thoroughly researched stocks that we strongly believe will bring returns for our investors.”
“Given the amount of time and work this process takes, the tradeoff is that we can’t own 100+ stocks: we wouldn’t have time to ensure all of them had the right profile for achieving the returns we want them to.”
For Pras, culture is everything. He describes Downing as the “perfect fit” for himself and Mike: “When we met Judith MacKenzie and the team, we quickly appreciated the similarities in our philosophy and style of investing,” he says. “There’s no pressure to move towards the consensus - in fact, just the opposite. Downing Fund Managers have a distinct culture and investment style that appealed to both of us. We slot in perfectly.”
For more information about VT Downing European Unconstrained Income Fund:
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