Morgan Stanley’s dual directional trigger jump notes on S&P seen as rewarding long-term bet

By Emma Trincal

New York, May 6 – Morgan Stanley Finance LLC’s 0% dual directional trigger jump securities due June 5, 2024 linked to the S&P 500 index should allow investors to easily outperform the market in a variety of different scenarios, advisers said.

Both the tenor and the terms give investors a greater chance to see a positive outcome, they noted.

If the index finishes at or above its initial level, the payout at maturity will be par of $10 plus the greater of the index return and 33%, according to an FWP filing with the Securities and Exchange Commission.

If the index falls but finishes at or above the trigger level, 80% of the initial index level, the payout will be par plus the absolute value of the index return.

If the index finishes below the trigger level, investors will lose 1% for every 1% that the index declines from its initial level.

Five-year term

Michael Kalscheur, financial adviser at Castle Wealth Advisors, said many of the terms of the product met his buying criteria.

For moderately bullish investors with a long-term horizon the payout was “almost ideal,” he said.

Kalscheur had no qualms about the duration of the notes, saying that giving up some liquidity comes with the territory of structured notes investing. In addition, his firm urges his clients to hold securities for the long haul.

“We’re not short-term players,” he said.

“Five years is not a problem for us. We tend to be a buy-and-hold type of shop. The five-year lock-up doesn’t scare us.”

Credit, dividends

This adviser also said he was comfortable with the credit risk exposure.

“The underwriter, Morgan Stanley, is fine. They’re on the list of the issuers we would use,” he said.

A longer maturity increases the length of time during which investors must forgo dividends, a common condition investors in structured products have to accept as a tradeoff, he noted.

But the yield on the S&P 500 index is now only 1.70%, he said.

“You’re not giving up a huge yield compared to other indices and in exchange, you’re getting a downside protection that’s significant.”

The underlying was also to his liking.

“Everybody knows what the S&P is. It’s in every portfolio. There is no need to explain anything complicated,” he said.

A good bet

More importantly, the payout offered reasonable chances to generate a profit, he said. His assertion was based on data on the S&P 500 index dating back to 1950 and collected by his firm.

During the observed period, a decline of more than 20% in the benchmark has only been seen 17.8% of the time over any five-year rolling period, his data showed.

A decline of more than 20%, which would cause noteholders to lose money, has occurred only 2.2% of the time, he added.

“I have a 98% confidence level that I’m not going to lose and an 18% chance that I’m going to get a positive return on the downside. This is really good,” he said.

“You’re going to outperform if the market shows modest gains. If it’s slightly down, you’ll outperform as well.

“It’s really ideal for someone who has some kind of moderate outlook one way or the other.”

Some bulls may like it

The combination of a digital boost, an uncapped upside and a soft protection on the downside that offers gains of up to 20% if the market is down made the note very appealing, according to this adviser.

“The odds are in your favor,” he said.

But even bulls would not suffer much aside from giving up dividends.

“It’s really nice to have this 33% minimum return while being uncapped,” he noted.

“If we’re lucky enough to double in the next five years, the upside is not capped. I’m not saying it will happen, but it can. In fact you have just about the same probability of losing money over a five-year period than doubling your money.

Since 1950, a 100% increase in the benchmark over a five-year rolling period has occurred 17.5% of the time, he noted, which is indeed nearly identical to the 17.8% observed frequency of losses.

“You’re not betting on a strong bull market. But if it happens, you won’t be penalized,” he said.

“If I want to be totally bullish, I will buy a five-year note on the S&P or a worst-of on the S&P and the Russell 2000 with 1.1 to 1.5 leverage, uncapped.

“Almost all of our bullish notes are like that. If you’re a bull, leverage and no cap is your best bet.

“This one is a little more conservative. You’re not 100% bullish.

“But with the absolute return, the digital and the unlimited upside, you really get a good bang for your buck.”

Low downside risk

Carl Kunhardt, wealth adviser at Quest Capital Management, said that the notes were a better alternative to holding the position long in an equity portfolio.

His favorite part of the structure was the upside as he sees little chances of a negative performance over the term.

“The likelihood that the S&P will be down by 20% over five years is pretty low,” he said.

“It’s nice to have the downside protection. But in that case, it’s sort of unnecessary.”

Bullish outlook

Kunhardt’s relatively bullish outlook on U.S. stocks for the timeframe could easily be expressed with the notes.

“We’re 11 years into the bull market. Conventional wisdom will tell you that somewhere in the next five years there is a correction,” he said.

“However, a lot of factors are very positive. The economic data coming out shows nothing short of an economic boom in the U.S.

“It’s not an overheated market. Valuations are not stretched. Inflation is contained.

“The Fed is doing what makes sense: they’re finally sitting on the sidelines on purpose.

“So the S&P is likely to be higher in five years.”

This did not mean that the bull market would continue to run with no correction during the five-year time period.

But the probability of a positive performance was “high,” he said.

“Even if you stick one or two corrections during the holding period, you’re still likely to finish higher because it’s a five-year and down markets typically last less than one year.”

The statistics confirmed his belief.

Equity substitute

“There have been a very limited number of cases in the past when the S&P has been down over a five-year rolling period. It almost never happens,” he said.

The absolute return feature maximized the chances of generating a profit too.

“With even lower probabilities of being down more than 20%, the likelihood of making money is very high.

“The uncapped upside is what you want when you buy equities. You want to be rewarded.

“Oh, and by the way, you get a minimum return of 6.6% a year. Mercer is only calling for a 7.5% annualized return looking forward. So, you’re still getting equity returns with very little downside risk.”

Kunhardt could not see how the notes would not be a better alternative to being long the index in a U.S. equity allocation.

“I can’t see any downside to this. You’re more likely to outperform with the notes than you are being long the index.

“And since the S&P is going to be your core allocation anyway, this is a great alternative to owning the index.

“I do like it a lot.”

The notes will be guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price May 31.

The Cusip number is 61768Y281.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.