Magellan’s long-awaited FuturePay product will help investors maintain a steady, regular and protected income by systematizing a basic bucket strategy according to the firm’s chief executive, Brett Cairns.
Speaking at a launch event in the CBD Tuesday, the CEO said FuturePay can be accessed as either a listed or unlisted fund and will rely on portions of capital taken from investors upon entry into the fund, which are placed in a reserve fund or “support trust”.
When the fund underperforms, money from the support trust will cover the shortfall; when the fund outperforms, a portion of this, too, will be taken to top up the support trust.
It’s a strategy that essentially formalises a basic investment strategy – setting aside a cash reserve (or bucket) so that income can be maintained without selling down when markets fall. Or, as Cairns put it, “to help support income in fall-back positions”.
The design goes some way to mitigating sequencing risk and smoothing the kind of volatility retirees generally fund unpalatable.
Yet there is a further cost for investors linked to the mutualisation of the fund’s reserve trust; investors won’t get their share of the cash bucket back.
“If you redeem and come to the fund directly and would like your money out we will give you the money direct from your portfolio, yet you will leave behind the value of those reserves. That’s the mutualisation,” Cairns explained.
“We’ve spent a bit of time on this,” the CEO continued. “Treating reserves this way leads to material efficiency.”
$50 million runway
The fund aims to pay income in the 15th of the month at a rate of 2.03c per unit at inception, growing with inflation quarterly. Income yield is targeted a rate of 4.24 per cent.
Investment will range across Magellan’s in-house global equities and infrastructure funds. The fund will be run by ex-Blackrock manager Paddy McCrudden.
Magellan will kick in $50 million to “help kickstart” the fund, Cairns said, and will incrementally add capital over time as required.
“That should be a proper pitch or a very long runway to grow in time, and that will allow users to naturally start to build,” he added.