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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.
As the UK emerges from the Covid-19 pandemic and shops and hospitality venues open up, many investment commentators have been urging us to buy into the inevitable business upswing in the retail, pub and restaurant sectors of the stockmarket. The annual UK Consumer Prices Index rose from 0.7% in March to 1.5% in April 2021, and with talk of labour shortages, chip shortages and delivery surcharges, commentators have also been recommending investment in commodities to ride the impending inflationary boom. Whether or not these strategies prove right in the short term, there remains the question of how long-lived these trends will prove. Are these shortages just a consequence of the world getting back to work? Or has government intervention on a huge scale during the pandemic unleashed forces which will permanently undermine the value of fiat money? Macro-economic forecasting is tricky at the best of times, and applying it to equity investing even more so. Investing with a much longer-term time horizon into businesses achieving sustainably high ungeared returns on equity is a more reliable (and less stressful) strategy.
The world’s most successful investor, Warren Buffett, certainly takes the long view. In his 1983 Chairman’s letter, for example, he commented that he had no interest at all in selling any good business that Berkshire Hathaway owned. He does of course have the advantage of permanent capital enhanced by regular cash flows from an insurance float (insurance premiums coming in monthly or annually), and mainly owns 100% of the businesses he invests in.
One of Buffett’s early acquisitions, See’s Candies, illustrates that investing in the right business over the long term renders macro-economic fluctuations unimportant and dwarfs any change in market valuation metrics (e.g. PE multiples).
In his 2007 Chairman’s letter, Buffett revealed that Berkshire Hathaway had purchased See’s Candies back in 1972 for $25 million. He remarked that at that time it was earning about $2 million on net tangible assets of $8 million, selling branded boxed chocolates mainly on the West Coast of America. So Berkshire paid about 3x book value and a 12.5x PE. Revenues in 1972 were about $30 million and pre-tax profits said to be a bit less than $5 million. So profit margins were in double figures, and return on equity an attractive 25%.
Roll forward 35 years, and Buffett revealed that See’s Candies was now achieving revenues of $383 million, and pre-tax profits of $82 million, increases of 12-and 16-fold respectively! Crucially, only an additional $32 million of capital had been required over that entire 35 years to generate total pre-tax profits of $1.35 billion!
Clearly if you can invest in a business earning high returns on equity and grow it with virtually no extra capital requirements, the returns are immense. Any increase in the PE multiple (we can only speculate on that as Berkshire’s valuation of See’s Candies is not disclosed) looks to have been dwarfed by the growth achieved in the business.
The story of See’s Candies demonstrates the importance of hunting out businesses with sustainably high returns on equity made possible by low capital requirements and enduring barriers to competition. It is hard over the long term for a stock to earn a much better return for the shareholder than the return on equity of the business that underlies it. If you invest in a low return business that has recently cut costs or is about to see a cyclical upswing, in the short term you may make a gain. But longer term, any business will trade at a valuation that bears some relation to its net asset value. If it cannot generate much in the way of retained profits on those assets, after interest, taxes and dividends are paid out, then the asset value won’t grow a great deal, and ultimately over the long term neither can the share price. So you have the pressure of needing to sell out again, or see any short term gains stall or reverse.
Given the record of Berkshire Hathaway, and the very clear message that their success is derived from investing in businesses which compound upwards high returns on assets, it is surprising that the vast majority of investors in the UK today focus on PE multiples rather than returns on equity. Not all earnings are created equal, and some require a lot more capital in their generation than others. Moreover, if the UK is set for a prolonged period of higher inflation, as many pundits predict, inflation-beating returns are also more likely to be earned by companies with low capital requirements and the pricing power to pass on any cost increases promptly.
That is just about the long and the short of it.
For more information about Rosemary Banyard, Fund Manager of the VT Downing Unique Opportunities fund please visit: downingunique.co.uk
Risk warning: 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. Diversification may not be achieved and investments may be in the same sector. 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.
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.
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