Ord Minnett Research Recommendation: Magellan Financial Group (ASX: MFG)
Magellan Financial Group launched its much-anticipated retirement income product FuturePay. The product aims to provide investors with predictable monthly inflation-linked distributions, with fixed monthly distributions that are expected to increase with inflation, leading to an initial annual yield of about 4.25%.
Magellan first revealed its plans to launch a retirement income product in February 2019. In August 2019, it raised $275m of equity, of which $50m was to be used to seed and launch FuturePay.
Investors are able to trade in the product through a listed entity, with the ticker FPAY on the Chi-X securities exchange, or invest directly through Magellan. In the future, Magellan anticipates FuturePay will be available through platforms and is waiting for the product to be rated. The company did not disclose its expectations for the size of the product, indicating only that it would target a portion of the retirement market, and that both the global and infrastructure funds would have ample capacity to accommodate it through their respective strategies.
FuturePay provides no guarantee or capital protection; instead, downside risk is managed through a combination of underlying portfolio construction and a cash-reserving structure that will be funded by Magellan initially and maintained by excess portfolio returns and net movement in unitholders. The company will provide a further backstop to fund distributions through a loan facility of up to $100m or 2% of net asset value.
In Ord Minnett’s view, the product is interesting and we expect a portion of the market to be attracted to the high (albeit not guaranteed) implied yield, particularly in the self-directed and self-managed super fund segment. Seeing FuturePay replace other products in a model portfolio within an adviser group is a bigger challenge, however, with allocated pensions providing an adequate mechanism for retirement income certainty.
We have not adjusted our flow assumptions materially at this stage, and await further indications of product performance and unitholder take-up. We maintain our Hold recommendation and have trimmed our target price to $51.00 from $52.00.
Walter is the Editor of Ord Minnett's retail investor publications, such as the Opening Bell, Ords Weekly and the Ords Monthly, along with various investment guides and investor information published by Ord Minnett.
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