Investing to draw a regular and predictable income from your investments often stands in conflict with seeking to achieve capital growth over time. Why is this?
The answer is market volatility, which leads to ’sequencing risk’.
For investors focused on accumulating savings, this volatility can work in your favour. By regularly adding to your investments, investors can take advantage of price declines that result from market volatility – a strategy commonly referred to as ‘dollar cost averaging’.
However, for those investors focused on withdrawing a regular and predictable income from their investments, particularly retirees, the exact opposite is true.
By regularly withdrawing from your investments, market volatility often works against you. This is because, when asset prices are low, you need to use more of your portfolio to fund the same dollar amount of income, leaving you with less invested and so limiting your compound investment returns into the future.
This results in ’sequencing risk’ because the sequence of how investment returns occur relative to the need to withdraw the income now matters.
The key to delivering investors a predictable income, while also achieving capital growth over time, is to develop a strategy to tackle sequencing risk.
With FuturePay, Magellan has created a solution to address this challenge.
How Sequencing Risk impacts retiree investors
FuturePay has been purpose built to help reduce the impact of sequencing risk. How does it achieve this?
FuturePay mitigates against sequencing risk by:
FuturePay invests in high-quality global companies with the potential to achieve attractive risk-adjusted returns over the medium to long term, while reducing the risk of permanent capital loss.
FuturePay utilises Magellan’s proven track record of investing in lower volatility, high-quality global companies, with a carefully selected portfolio of Magellan’s Global Equities and Global Listed Infrastructure strategies.
Magellan’s investment approach focuses on reducing ‘downside risk’ – that is to say, to reduce the risk of the value of the portfolio falling by as much as, or more than, the broader equities market when equities markets fall materially.
The concept of putting something aside in good times for an inevitable ‘rainy day’ may not be new, it is a powerful and effective insight into how to manage risk.
Sequencing risk hits hard in periods of poor performance in investment markets if assets need to be sold to fund regular income.
Setting aside or reserving some of the gains made from investment assets when they outperform and drawing upon those reserves to support income when investment markets inevitably fall, can mitigate the need to dip into investment assets in poorly performing markets.
However, the challenge in implementing an effective reserving strategy is knowing exactly how much of your investment assets to set aside as a reserve, when to add to them and when to use them.
FuturePay has a reserving process embedded into the product itself. FuturePay will make regular contributions to the Support Trust, a separate pool of assets managed for the benefit of FuturePay investors. The Support Trust is designed to provide potential income support to FuturePay during poor market conditions.* This is further supplemented by a MFG Reserve Facility. These assist FuturePay in delivering its objective of providing investors with a predictable and growing monthly income stream, while reducing the risk of permanent capital loss.
How it works >
Reserves are pooled with other investors to make the process more efficient.
When you invest in FuturePay you have the potential to benefit from the capital reserves accumulated in the Support Trust by past and existing members.
This is an important feature of FuturePay. Reserving as an individual investor can be effective, however, on average you will need to set aside a larger proportion of your savings as reserves than if you combine your reserves with other investors. This is important as having too many reserves can be costly, resulting in a drag in investment performance that impairs total investment returns.
To help achieve this efficiency, when you redeem your investment in FuturePay, like those before you, you leave the value of this benefit behind.
Amounts contributed by FuturePay to the Support Trust are not paid to investors when they exit FuturePay. This money remains pooled in the Support Trust for the benefit of all remaining investors, as it did when you were invested.
By pooling your reserves with other investors FuturePay aims to deliver a more efficient and optimal reserving process, maximising the benefits to you of reserving.
Receive the benefit of Magellan's support as initial reserves are growing and a further level of supplementary ongoing income support.
On launch, Magellan Financial Group will provide its own capital to help kick start the Support Trust - so investors have the potential to benefit from income support from day one.
Further, if the assets in the Support Trust are low, FuturePay can borrow additional funds from Magellan Financial Group to support FuturePay in paying the target monthly income to investors. This is only repayable when Support Trust reserves have recovered and FuturePay outperforms its inflation objective.
A predictable monthly income that grows with inflation
Driven by returns and capital growth, with a focus on downside protection
Underpinned by a reserving strategy and income support
Together with daily access to your capital
how does FuturePay work?
Enter your proposed total investment or desired monthly income.
Magellan Asset Management Limited ABN 31 120 593 946, AFS Licence No. 304 301 (Magellan) is the issuer of units in Magellan FuturePay (FuturePay) ARSN 645 515 082. This FuturePay calculator is not intended to be relied upon for the purposes of making any investment decisions. You should consider seeking professional advice before making any investment decision.
The results and estimates which are generated when you use the calculator are only intended to provide general illustrations and must not be deemed to represent accurate forecasts, nor are they intended to constitute financial product or taxation advice. Users of this calculator should note that any results and estimates generated when using the calculator are dependent on: (i) the variables entered into the fields by the user; and (ii) the Fund’s most recently available unit price and current target monthly income per unit. As the variables entered and underlying assumptions are not expected to align to your situation precisely, the results and estimates produced by the calculator will not be necessarily be accurate, nor do they make any accommodations for personal income tax. You should consider the product disclosure statement (PDS) for FuturePay, which can be accessed here, and your personal circumstances in order to decide whether an investment in FuturePay is suitable for you. Magellan and its related bodies corporate disclaim any liability (whether based in contract, tort, strict liability or otherwise) for any direct, indirect, incidental, consequential, or special damages arising out of or in any way connected with the use of this calculator. Under no circumstances will Magellan and its related companies be liable for any loss or damage caused by a user's reliance on information obtained by using this calculator. You should not make any decisions on the information generated from the use of this calculator without first consulting with your licensed financial adviser.
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