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.

Confirm

Welcome to Downing LLP

Other
plus icon
document search icon 3
12/10/2023
5
min read

Keeping the lights on: the importance of grid support services

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 is seeing 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

Learn more about the Fund here.


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.

Grid infrastructure

Renewable energy is at the heart of the UK’s decarbonisation efforts. While wind farms, hydro plants and solar farms are a constant in public and government rhetoric, little is usually spoken about the vital infrastructure that enables the stability of the electricity grid, and the investment opportunity this segment of the energy infrastructure sector offers.

As well as investing in assets that generate energy, Downing is committed to investing right across the energy infrastructure sector including assets that help to store, moderate and distribute that energy.

These assets allow us to diversify our revenue streams, with the aim of providing stability and resilience to our overall portfolio - acting as a ballast against market uncertainties and volatility. We believe this approach can enhance the financial stability for our investors.  

Ensuring grid stability

Investing for grid stability is crucial for our homes, businesses and industries, and is a key enabler for an efficient and growing economy. Infrastructure that supports the National Grid can include industrial batteries, shunt reactors, power stations and electricity cables and lines. The National Grid plays a crucial role in balancing supply and demand to maintain a stable electricity supply.  

To ensure renewable energy is passed from the energy-generating technology to the National Grid efficiently and cost-effectively, specific grid stability services have been created.

Downing has started to invest in these markets which are fundamental for contributing to renewable energy consumption and adoption and will also support our aim to diversify and stabilise the revenue streams for our shareholders. 

What are the grid support services in the UK?

Grid support services are a contract between holders of energy assets like Downing, and the National Grid, designed to supply or decrease electricity to the grid in response to consumer demand in exchange for payment. They provide another revenue stream for energy producers in addition to the sale of energy to wholesale markets.  

Firm Frequency Response (FFR) is currently the main agreement in use, whereby assets commit to providing a certain amount of power to the grid. This will soon be replaced with the new suite of Dynamic Services, which predominantly consists of Dynamic Containment and Dynamic Regulation.  

Dynamic Services are part of a suite of services aimed at controlling the frequency of the electrical grid to keep it within specified limits. These services are crucial for maintaining the stability of the grid. It mainly comprises:  

  • Dynamic Containment (DC) rapidly responds to major disruptions in the grid's frequency, such as large losses of power generation. It uses generators to inject or reduce energy in proportion to demand to bring the frequency back to its target value. Batteries’ speed and flexibility make them particularly well-suited to the task with a reported 0.5 second response time.
  • Dynamic Regulation (DR) automatically adjusts power generation or demand major disruptions occur to keep the grid frequency steady across a range of operational frequencies.  

The National Grid’s Dynamic Services is strengthening Britain’s electricity system, making it smarter and more flexible, meaning it can accommodate more renewable power, contributing significantly towards the ambition of decarbonising the energy system.  

Maintenance man inspecting solar panels

How is Downing invested in grid stability services?

Mersey shunt reactor:

A shunt reactor is an electrical device used in power systems and electrical networks to control voltage levels by absorbing or generating reactive power. Reactive power is the component of power that does not perform useful work (such as active power, which powers devices) but is necessary for the operation of inductive loads and maintaining voltage levels within acceptable limits. Shunt reactors are an essential part of power system design and operation, helping to maintain the stability and efficiency of electrical networks.

In June 2023, Downing Renewables & Infrastructure Trust (DORE) signed for Mersey Reactive Power - a UK-based, fully operational 200 MVAr shunt reactor for c.£11 million. This grid services asset became operational in May 2022 and was the first project to go live as part of the National Grid's Stability Pathfinder initiative.

Strategic battery storage:

Batteries serve as huge electrical grid-linked reservoirs, storing energy that would otherwise be wasted when excess renewable power is generated and supplying it when the grid needs it most. This smooths out the irregular patterns of wind and solar generation that can occur due to the reliance on unreliably sunny or windy days.  

In 2019, Downing acquired development rights to construct a 50MW transmission-connected battery asset in Southampton, UK, which became operational in June 2023. It will provide vital storage capacity to the National Grid’s transmission network. The Nursling battery asset has been providing FFR, DC and DR.

Investing overseas: Nordic Wind Farm

Grid stabilisation services are prevalent in international energy markets, particularly in the Nordic countries where Downing is invested, which produce large amounts of renewable energy and so require the intensive measures to ensure electricity is pushed to the grid in a stable manner.  

One of Downing’s wind farm assets, Konttisuo Wind Farm in Finland, acquired in 2022, participates in Finland’s balancing energy and capacity markets, known as mFRR – a similar system to the UK’s National Grid’s FRR service.  

Since we made the acquisition, we installed additional capability comprising both hardware and software, underpinning our strategy of leveraging our assets to enhance the revenue streams and deliver further value for investors.

The impact for investors

Participating in grid stability markets is a crucial part of the transition to net zero. It also supports our strategy of diversification through technology, geography and revenue streams as we endeavour to create truly diversified investment portfolios, and provide new, long-term revenue streams for Downing-managed funds.  

Here at Downing, we are always looking to further diversify our portfolio and our revenue streams. Our objective is to ensure we are not reliant on merchant power pricing, which is derived from selling the energy our renewable energy assets produce to the grid. An important part of this strategy is by increasing our funds’ exposure to the grid services sector - ultimately increasing the stability of revenues and consistency of income to our investors. 

 

Find out more about Energy & Infrastructure at Downing

Share
https://downing.co.uk/insights/keeping-the-lights-on-the-importance-of-grid-support-services

We're here to help

If you are a financial adviser, or discretionary fund manager call 020 7630 3319 or email us at sales@downing.co.uk

If you are a private investor call  020 7416 7780 or email customer@downing.co.uk