The Magellan Financial Group Ltd (ASX: MFG) share price is on watch today after revealing its new retirement product called FuturePay.
What’s FuturePay?
Magellan has been working on this retirement market for quite a while now. It has finally been revealed.
Magellan wanted to essentially re-create a pay cheque for retirees. The question was:
“How do you maintain ready access to your savings and invest to receive a regular and predictable income that keeps pace with inflation, without eroding your capital base?”
It didn’t want to launch an annuity. Magellan wanted to create a product that creates capital growth to ensure it lasts into the future which is unknown and perhaps could be a bequest wish. They may also want ready access to savings if required which can provide peace of mind,
Annuities don’t give easy access to funds. Obtaining predictable income can mean accepting lower income, with limited growth. But investing for growth means unpredictable income and more risk.
Magellan’s solution
It wanted to create a product that could solve these risk management techniques and balances the competing objectives effectively and efficiently.
FuturePay will provide a predictable monthly income that grows with inflation. The distribution is a fixed dollar amount, not a percentage of the capital.
The actively managed fund will be driven by capital growth, with a focus on downside protection.
It’s going to be underpinned by a reserving strategy and income support.
Investors will get daily access to capital, if they wanted it.
The fund will invest in lower volatility, high quality global companies.
Reserving strategy
The FuturePay fund will build a pool of reserves that can provide income support in adverse markets to avoid the need to sell assets.
After an initial investment, FuturePay will contribute a “relatively small amount” to the Support Trust.
In rising markets, FuturePay will reserve some portion of its outperformance to the Support Trust. In falling markets, the Support Trust will give income support to help achieve the target monthly.
However, if investors leaves FuturePay, then they will leave behind the value of the benefit provided by the support trust, to be retained by remaining investors.
Magellan has set aside $50 million to be incrementally added to the support trust as new units are issued. It has committed a reserve facility equal to 2% of FuturePay, capped at $100 million, to provide additional support during poor market conditions.
Summary thoughts on FuturePay
The starting yield for FuturePay will be around 4.25%. It’s a very interesting idea. The whole thing doesn’t seem that dissimilar to what listed investment companies (LICs) are capable of doing. But monthly income and the Support Trust are intriguing differences.
I can see why it might be attractive for retirees. Magellan must also think it will be good for its business if it can gain traction. There’s no implict ‘guarantee’ like there is with an annuity, nor is it capital protected. But it could lead to a nice rise in funds under management (FUM) over time for Magellan.
