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 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.
UK equity funds
The first quarter of 2022 has been very difficult for UK equity funds focussed on investing in quality growth businesses. The mood music probably changed around September 2021 with growing expectations of rising interest rates as inflationary pressures built up. Growth companies were the worst hit as profit growth projected well into the future was discounted back to the present by the market at a higher interest rate. In addition, wage pressures appeared particularly severe in the technology sector, silicon chip shortages were acute, and supply chain pressures built up as the world recovered unevenly from the Covid pandemic. On top of all this, the invasion of Ukraine has added fuel to the fire, with fears of shortages and attendant price increases in oil, gas, wheat, and sunflower oil, to name but a few vital commodities.
There is every likelihood that these pressures will persist for some time. The macro-economic background remains an important influence on businesses, but we are among those who do not claim any ability to forecast the future. The most that can be said is that if there is a sharp squeeze on consumers and businesses from resource price inflation, perhaps this will not necessitate such significant increases in interest rates as were previously feared.
There is, of course, a huge temptation when quality growth companies are out of favour to shift part of your portfolio towards resources, or renewables, or banks, or big pharma. However, being a follower of fashion in investing is dangerous. As my colleague and fund of funds manager Simon Evan-Cook recently pointed out in an article published in Citywire, fund buyers want the certainty of knowing that a manager will stick to their style and investment philosophy, as they combine different funds into portfolios.
After the savage sell-off in quality growth companies in January and February this year, taken overall, share prices have settled down in absolute if not yet in relative terms. Bottom-fishing is never a comfortable pastime, but reassurance can be taken from four angles.
Firstly, and most importantly, quality companies with highly defensible market positions and sticky customers continue to generate profits and cash, and many are passing on inflationary costs in higher selling prices - albeit sometimes with a few months lag, depending on contract terms. Most have resumed dividends post-Covid, and some are paying out special dividends on top. In my VT Downing Unique Opportunities Fund, only two companies have now not paid a dividend since the Fund launched two years ago, and one of those hasn’t had a strategy to do so.
Secondly, we are seeing directors purchasing shares, or choosing not to sell any to fund the tax on their LTIPs. At the last count, in my own fund this year there are eight companies out of 33 where director purchases outside of the ordinary pattern have been spotted (Aptitude Software Group Plc, AG Barr Plc, Dotdigital Group Plc, Dunelm Group Plc, Elementis Plc, Mortgage Advice Bureau Holdings Plc, Strix Group Plc and Tatton Asset Management Plc).
Thirdly, companies are buying back their own shares, and we actively encourage this at least to offset the dilution of issuing shares under incentive schemes. The most satisfying example this year has been EKF Diagnostics Holdings Plc, which had issued $10m of shares to a vendor last autumn (valued at 81.6p per share) to fund an acquisition, and has now bought them all back in at 43.29p, thereby effectively halving the initial acquisition cost to the company.
Finally, corporate activity continues. While IPO activity has gone quiet, and most of last year’s crop are underwater (we declined to participate in any), private equity has in recent weeks announced a number of bid approaches – Ideagen Plc, Homeserve Plc and RWS Holdings Plc to name a few. Companies continue to have the confidence to announce bolt-ons but also more major moves, and it seems likely that in the aftermath of Covid, with a war in Europe and share prices lower, many private company sellers may now decide that it is time to accept that cash offer that has been patiently held out to them by a cash-rich public company.
For all these reasons, and because fund buyers need to know where they stand, we will be sticking to our knitting. Rather than buying and selling for short-term profit, we make investments at valuations we believe will provide shareholder value over the intended long-term period of investment.
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 and are higher risk compared to investments solely in larger, more established companies.
Important notice: This document 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.
.jpeg)