IIR Initiates Coverage on Magellan FuturePay (Managed Fund) (Chi-X: FPAY)

August 31, 2021

Magellan FuturePay (Managed Fund) (Chi-X: FPAY) (“FPAY” or the “Fund”) is a newly created exchange traded managed fund (ETMF) that is seeking to provide investors predictable, monthly distributions that grow with inflation, with the potential for capital growth and protection in down markets. The Fund will be managed by Magellan Asset Management Limited (the “Manager”). The Manager is also the Responsible Entity (RE) of the Fund and will be responsible for making a market for the Fund. The Fund will seek to achieve its objective through an investment in a portfolio of securities that represents a blend of the Magellan Global Plus strategy (50%-60%) and the Magellan Core Infrastructure strategy (40%-50%), in combination with a reserving strategy whereby cash will be directed to a discretionary trust (“Support Trust”). The Support Trust will be used to support distribution payments if the portfolio performance is insufficient to meet the ongoing distribution requirements. The Support Trust is a separate pool of assets, which investors have no rights to.

A key aspect of the Fund is that it will be mutualising, via the Support Trust, a portion of the capital from the issue of new units and some of the excess returns of the portfolio to support distribution payments in weak markets. The premise for the reserving strategy is to reduce the erosion of the value of the portfolio of securities in weak markets by using the assets of the reserve (Support Trust) to contribute to distributions (either partially or fully).

Independent Investment Research (IIR) has assigned Magellan FuturePay (Managed Fund) (Chi-X: FPAY) a Recommended rating. The Fund provides an innovative solution to investors by aiming to provide a stable and predictable regular income stream over the long-term, while growing with inflation combined with the potential for capital growth. The Fund seeks to address the key drawbacks of other products offering inflation-adjusted income streams with an enhanced yield, capital growth potential, easy access to capital, and protection against deflation. In return for providing this, investors may forego the Mutualisation Amount upon exit, which represents the value of the Support Trust Rights to FPAY, capped at 7.5%. The mutualisation of capital and the use of the reserving strategy seeks to achieve the key objectives of the Fund including providing a steady inflation-adjusted income stream and preserving invested capital in weak markets. However, we note that the product is new and has no performance history and the mechanics of the Fund are highly engineered. As such, the Fund encompasses the execution risk associated with a new product.

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