Downing Fund Managers: building towards critical mass with new breed of funds

“Growing slowly from a small base, as you look back at many fund managers' track records, that's when you can tend to outperform,” says Downing partner Judith MacKenzie

Downing Strategic Micro-Cap Investment Trust PLC -

When investment funds are in their early stages many big institutions can be reluctant to invest – but shrewd private investors know that getting into a fund in the first few years is not only exciting but also can be very rewarding.

Downing Fund Managers (DFM), the asset management arm of Downing LLP, has five funds and most of them are still in their early years.

The VT Downing Unique Opportunities fund, run by Rosemary Banyard, was launched in the very teeth of the coronavirus crisis and has delivered a cumulative performance of 66% since launch and a 48% discrete one-year performance to the end of April. Banyard, a former Schroders manager, was awarded a AAA rating by Citywire earlier this year and a four-diamond rating from Defaqto.

Also in March 2020, the VT Downing Global Investors fund was launched under the management of Anthony Eaton; it has delivered a 57.6% gain since launch, with the cumulative and discrete one-year performance both ahead of benchmark and in the top-quartile.

Both managers were brought under the DFM roof by Downing partner Judith MacKenzie, who heads up the asset management business.

“The hard yards are when you have to launch a fund with minimal FUM [funds under management], and get it off the blocks to over £50mln. And we're making great progress towards that with all of our mandates now,” she says.

“Rosemary and Anthony’s funds started with very little seed capital and therefore getting to that position without a three-year track record is no mean feat – so we're pretty confident about these funds, which is reflective of the quality of the managers.”

She says there's a perception from some institutions that a small fund can be a negative – “but frankly some investors who are quite savvy know that Rosemary's got a great track record from Schroders (LSE:SDR), and Anthony's offering something different.”

The third of the new breed is the VT Downing European Unconstrained Income Fund, which was launched under managers Mike Clements and Pras Jeyanandhan in November.

The new funds are beginning to build good track records and, importantly, says MacKenzie are indicative of the boutique strategy she is deploying.

This gives DFM a lot more flexibility than larger rivals and this is something MacKenzie is spreading to the management structure of each fund.

“We really want managers with skin in the game, and that's not just in their own fund,” she says.

“What we're doing is creating an ownership structure for each one of the funds, so the manager has a profit share and ownership of that mandate alongside Downing.

“That’s not something you’re really going to get from one of the larger houses.”

With managers having been given ownership of their funds makes very few other demands, meaning the only pressure is to deliver a good fund performance.

There are themes that run through the funds however, though they are more to do with the personality of the managers that MacKenzie has hired – “they’ve got to be people we would want to go to the pub with to gossip about the market.”

A contrarian approach is fairly consistent across the funds and most of the managers pursue bottom-up investment processes, focusing on the fundamental attractions of an investment, and aim to keep highly concentrated portfolios of 20 to 40 companies.

Eaton’s global fund is the outlier on the last two accounts, offering more of a thematic approach and a portfolio of closer to 200 companies.

“One thing that runs across all the funds is that the managers are not being put under pressure to grow assets quickly.

“We can actually structure their fund size to what the best thing is for that mandate – and we're not going to ever put pressure on them to go beyond that. That's when performance can sometimes be compromised,” says MacKenzie.

“Growing slowly from a small base, as you look back at many fund managers' track records, that's when you can tend to outperform – not when you've got £5bn sitting nagging at them all the time.

“So while some people view being small as a turn off; others see it as an opportunity.”

She herself also runs the Downing Strategic Micro-Cap Investment Trust (LON:DSM), which at four years old is also pretty young.

Having been focused on what was an unloved area of UK micro caps during the run-up to Brexit, the trust has started to become more appreciated over the past year with the revival of interest in companies on these shores and as its value investment style becomes more popular again. It has delivered NAV growth of 26% over the past 12 months.

The fifth and the oldest fund in the range, at 10 years, is the VT Downing Monthly Income fund, though Josh McCathie only took over as lead manager in April this year, having been co-manager for the last 2.5 years. The fund has delivered 27.5% growth over the past 12 months.

MacKenzie plans to add more funds but will be careful in not going too fast.

“I want to prove that we can get to a decent size of FUM with these mandates before being distracted and going off and doing another five or 10 of them.”

“I think we've got a really good prospect of getting these funds to critical mass in the short term, and with the benefit of now having the one year track records I'm pretty sure that we can get to the target fund sizes that these managers aspire to.”

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