Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 415

Magellan’s FuturePay seeks to offer income with added support

What if you could invest to grow your nest egg and take a regular, predictable income without having to sell down any of your capital? Sounds like the dream, right? Magellan's new FuturePay fund aims to do just that.

FuturePay (FPAY), issued by Australian fund manager Magellan, invests in a portfolio of high-quality, low volatility global listed companies which the manager believes can deliver attractive, risk-adjusted returns over the medium to long term. Portfolio constructions will be focused on protecting investors on the downside. Alongside returns and capital growth, the fund provides its investors with a predictable monthly income that grows with quarterly inflation.

Magellan will pay out returns from the global equity portfolio’s regular income in good times and draw on the cash reserve (called a Support Trust) attached to the fund in the bad. At inception, the fund is targeting an initial yield of 4.3%, paid monthly.

Magellan Chief Executive Brett Cairns said the product sought to address the challenges faced by investors seeking to establish a reliable income stream in retirement.

"The challenge is thinking about the other side of accumulating savings," he said.

"Once you have some money, you then look to maintain access to those savings, and grow those savings such that you have a regular and predictable income that keeps pace with inflation.

"But it's also important that you don't erode your capital. This need shows up most in retirement where your savings need to replace your pay cheque. Here we wanted to re-establish some sense of a pay cheque that's regular and predictable, and into the future which is unknown.

Cairns added that he believed the investment needed "some sort of growth aspect" as a hedge to longevity risk and aid to intergenerational wealth transfer.

"Not knowing how long you're going to need that capital for means you're dipping into and eroding it over time. It leaves you with risk for how long you're going to live."

Cairns said that the idea for the fund, which was three years in the making, was drawn from a technique already used between advisers and their clients. This involves setting aside a "cash bucket", alongside the "growth bucket", to be drawn upon in down markets. As such, investors aren't forced to sell their investments when the markets fall but can dip into the cash. This, he says, is an acknowledgement that sequencing risk can work against retirees, but also that markets do recover over time.

$50 million commitment

Magellan Financial Group will initially seed the Support Trust with $50 million, paid in increments. The listed company has also committed a reserve facility equal to 2% of the fund, capped at $100 million to "provide additional support during poor market conditions".

Additional payments into the Support Trust will flow from two key sources:

1) When investors purchase units in the fund, a small amount of capital will be contributed from the fund to the trust. This is known as the 'adequacy contribution' and on the first day of trading stood at 6.71%. This ensures that investors coming into the fund pay for the value that's already in the trust and that the reserve remains adequate.

2) In rising markets, where the portfolio is outperforming its inflation-adjusted index, FuturePay may reserve a portion of its outperformance by contributing capital to the trust.

Magellan FuturePay | Asset classes and allocation ranges

Source: FuturePay PDS

The fund launch comes as Australian retirees seek to navigate a treacherous strait in the market. Today's rock-bottom interest rates have made drawing a regular, liveable income from a traditional ‘retirement portfolio’ with its higher allocation to bonds and cash near impossible. Meanwhile, retirees are generally reluctant to draw down their capital due to complexity, a lack of guidance, longevity risk and concerns about possible future health and aged care costs. This forces retirees to take on riskier investments in the search for yield at a time when they have less capacity to recover from market setbacks.

"Investing was once relatively straightforward for highly-conservative investors," Morningstar Editorial Director Graham Hand wrote in late 2019.

"As recently as 2012, the cash rate was greater than the 4% annual minimum drawdown required from a superannuation pension account. Further back to the 1990s, periods of double-digit cash and term deposit rates avoided the need to go into anything riskier than term deposits, although inflation was higher.

"Fast forward to now, as we enter the 2020s, there is nowhere to hide that gives capital security, a return greater than inflation and avoids a continual drawdown on a pension."

Captive cash and equity market exposure

So, what's the catch? The assets in the FuturePay Support Trust do not form part of the assets of the fund. Therefore, if you choose to redeem your units, the price you receive will reflect the value of the investment portfolio. You leave behind the value of your benefit in the reserve so that the remaining investors receive the benefit. Cairns says this reflects the 'mutualisation' of the fund.

"This fund is funded by the investors in FuturePay and it exists for the benefit of the investors in FuturePay – both by upfront contributions and ongoing contributions from outperformance," he says.

"Treating the reserves in this way leads to a material efficiency and while the initial reaction might be ‘well, I'm leaving something behind’, it does actually mean that you don't need as much in reserves."

The exit price from the fund will be the NAV per unit less the mutualisation amount. The NAV comprises the value of the securities the fund owns and the value of the Support Trust rights, but not its assets and liabilities. This structure could encourage investors to remain in the fund in falling markets, or when they need the cash, for fear of losing access to the cash distribution, which their initial investment and continued returns help fund.

The income investors receive, unlike a traditional life company annuity, is not guaranteed. It is a target. In deciding whether to make less frequent payments, the trustee may consider the fund's investment performance, the reserve ratio and prevailing market conditions.

The fee structure is complex. As stated, Magellan will charge a fee of up to 1% a year on the value of the investment portfolio. Fees are not charged for the value of the Support Trust or to Magellan to manage the support assets.

Magellan will also reduce its fee for interest it receives on cash held by the Support Trust. This is expected to result in the fee paid by investors on the total assets being managed by Magellan of around 0.90% per year.

Investors will also fund the reserve contributions made to the Support Trust, with an estimate of this net cost at 0.52% a year. Magellan says this cost will turn into a benefit when FuturePay receives payments from the reserves held by Support Trust.

In the end, this is still an equity fund with assets similar to Magellan’s global and infrastructure funds. It's an equity fund that pays a regular, inflation-linked income, but an equity fund all the same. Equities carry risk to capital. Could you stomach a 50% equity market drop, and for how long? Magellan Global does have a long history of superior downside protection, most notably during the initial covid-19 sell-off, during which it fell 1.2% versus the index's 9% loss. But investors should, as the product disclosure statement recommends, expect to hold their investment in the fund for seven to ten years. There is no silver bullet, as Magellan General Manager Frank Casarotti noted.

"We do believe that this offer will be appealing to some investors, particularly in the retirement income space," he said at the launch.

Like its flagship Magellan Global product, FuturePay will have two access points – directly with the fund (via the unit registry) and via the Chi-X exchange, ticker FPAY. This will allow everyday investors immediate access and liquidity. Cairns also hopes the fund will appear across investment platforms, which could open the fund up to the advice market once it appears on approved product lists.

The first distribution has been set at 2.03 cents per unit, paid on the fifteenth of the month. The current income yield is around 4.25%, based on an initial NAV of $5.75 per unit.

 

Emma Rapaport is Editor Manager at Morningstar, owner of Firstlinks. This article is general information and does not consider the circumstances of any investor. Magellan is a sponsor of Firstlinks.

This is the second of four articles which will examine alternative solutions to reduce the potential to run out of money for retirees. The first article is here.

A Morningstar Premium free trial is available on the link below, including access to the portfolio management service, Sharesight.


Try Morningstar Premium for free


 

RELATED ARTICLES

Buffett says stock picking is too hard for most investors

How do different investing styles work?

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Latest Updates

Superannuation

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?

Interviews

Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.

Superannuation

Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.