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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.
Record house prices, an insatiable demand for new housing and pandemic-induced volatility in the market could all be on the cards for the property sector in 2022.
Downing’s Head of Property Lending, Parik Chandra, unpicks the current unsettled state of the property market.
The housing market juggernaut continues
Despite the stamp duty incentives coming to an end in September 2021, house prices continued on an upward trajectory. The December 2021 UK House Price Index placed the average price of a property at £274,712. That is a 10.8% increase when compared to 2020. It appears that pricing is showing no signs of plateauing.
Will house prices crash in 2022? No is the short answer, save for an unforeseen systemic shock - though the longer answer depends on a variety of factors.
Despite house prices being high already, generally I still expect to see growth over the next 12 months, but at a slower rate than we have experienced over 2021. Despite interest rates increasing to 0.75%, mortgage availability I imagine will remain robust. But, while everyone talks about the Housing Market, the reality is there is no such thing. The market is made up of thousands of micro markets and so pricing trends seen in one part of the market may not be linked to another. Not all properties are equal, and neither are all micro markets.
As a nation, we are obsessed with home ownership and house prices, as so many of us view a house as both a home and an investment. At Downing, we take our role as responsible investors very seriously and look to help support the UK's housing needs, so as many people as possible can achieve the dream of having a home and their own asset. To make this happen, we focus on making secured loans to property developers delivering residential-led schemes nationwide. Additionally, we also provide wholesale finance solutions to fund bridging lenders to provide greater support to SME developers through a different funding strategy.
Mass market housing to alleviate pricing
From a governmental standpoint, initiatives are typically focused on the demand side of the housing market. I would like to see more government support that looks instead at the supply side as the disparity between supply and demand continues to push up house prices.
Throughout 2021, there was a lot of pressure on supply chains and raw materials. The price of steel and timber inflated dramatically during 2021 due to increased demand and supply chain issues. Based on what we are seeing with the schemes we are currently funding some cost stabilisation has occurred, but higher costs remain a risk in 2022. Despite the impact this has had on developers margins, most SME developers remain eager to capitalise on a buoyant seller’s market.
With the number of properties on the market not replenishing those that are being sold and the number of people looking to buy a property being 20.5% higher than the average for 2020, new housing has got to be a priority heading into 2022. As senior lenders, we aim to play our part in helping SME developers build mass-market housing which is less subject to pricing volatility. To support this, we’re proud to have facilitated the construction of over 1000 homes since 2017.
With new houses increasingly in demand, we see this as an important social factor for the wider economy. We would like to engage with the government to reform policies around planning and housing delivery in the UK. Some councils can take over a year to determine relatively simple planning applications and that is a major hindrance to SME developers.
In the House of Commons library, it states that “Governments since 2015 have pursued both supply-side and demand-side measures. There has been and continues to be, a desire to increase homeownership, particularly amongst first-time buyers... There is an expectation that most new building will be carried out by the private sector. To this end, much Government effort to stimulate house-building has been focused on planning measures to ‘make the system more open and accessible and tackle unnecessary delays.’”
We welcome all initiatives that support increasing housing supply, but I do think there is some disparity between what has been pledged by the government and what has materialised. But house prices are likely to remain stable with an increased supply in the UK. As a lender, we want to see a stable housing market that encourages sustainable price growth supported by economic fundamentals, such as healthy supply and demand and a robust employment market.
What will define 2022?
A lingering theme from 2021 that will continue to define 2022 is pandemic-induced uncertainty. We are likely to see an unwinding of government schemes that were introduced to combat the pandemic. Even Covid-19 itself will present challenges and uncertainty as new variants come into play.
Furthermore, we have found that Brexit has blurred into the background over the last year and it has been difficult to distinguish whether the current challenges are Brexit or Covid related. Either way, this will continue to impact the construction industry through labour and material shortages. Inflation is also having a visible impact on the cost of materials which developers may need to cost in.
Property investors can look ahead to 2022 with reasonable confidence. But what I’m keen to keep an eye on is the environmental cost of development. Usually, the skyscraper is the ultimate symbol of prosperity, but green is going to be king in the next 12 months.
New standards announced by the government in 2021 encouraged all new homes to produce 75-80% lower carbon emissions compared to current levels by 2025 and from 2021, new homes will be expected to produce 31% lower carbon emissions.
By nature, new homes are more energy efficient than older ones, however this will still present a challenge to developers. But a challenge well worth taking on as all sectors set a course for the 2050 net zero target.
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