Morgan Stanley’s leveraged notes on Stoxx Global Select offer 95% protection, no cap

By Emma Trincal

New York, Dec. 19 – Morgan Stanley Finance LLC’s 0% equity-linked partial principal at risk securities due Jan. 2, 2024 linked to the Stoxx Global Select Dividend 100 index offer a compelling structure with bullish features and nearly full capital protection, advisers said. But in exchange, investors are exposed to a low-volatility index with a modest track record. They also must give up a high dividend yield over a four-year period.

The payout at maturity will be par plus 208% of any index gain.

If the index falls or remains flat, the payout will be par plus the return, with a minimum payout of 95%, according to an FWP filing with the Securities and Exchange Commission.

“Obviously I like the terms of the note: 2x up, no cap and 95% of principal-protection. That’s a nice structure,” said Steve Doucette, financial adviser at Proctor Financial.

“Problem is: this index hasn’t done much.”

Lackluster track record

The index is up 18% for the year, versus nearly 28% for the S&P 500 index.

The annualized total return was only 6.2% for the past three years and 7% for the past five.

The one-year volatility of the index is 10.5% versus 18% for the S&P 500 index.

“The structure is neat. But when I look at the return of this index, I just can’t get excited,” he said.

“And with the notes, you’re not even getting those numbers because the dividends are extracted,” he said.

The index yields 4.1%.

High yield

The Stoxx Global Select Dividend 100 index combines 100 of the highest dividend-paying stocks relative to their respective home markets. It consists of 30 stocks from the Stoxx Europe Select Dividend 30 index; 30 stocks from the Stoxx Asia/Pacific Select Dividend 30 index; and 40 stocks from the Stoxx North America Select Dividend 40 index.

This index is not often used as a structured note underlying. So far this year, two issuers – BofA Finance LLC and Credit Suisse AG, London Branch – have priced notes on the Stoxx Global Select Dividend 100 index for a total notional of $39 million, according to data compiled by Prospect News. Credit Suisse did the largest one for $28.58 million last month.

Not for growth

“Some people do nothing else but dividend strategies,” said Doucette.

“That would be a nice income play.

“But if you want growth, you’re not getting much. This one pays such a high yield... it doesn’t make sense to give up the dividends, especially with this performance.”

Doucette said he would be interested in replicating the structure as closely as possible, but with another underlying.

“I may want to find an index that performs better than this one for my growth allocation and try to identify one that pays a high dividend too. It may not be as high and I may not be able to get the same terms. But I would be willing to give up a little bit of leverage for something that looks like this one only on a more aggressive index,” he said.

Return enhancement

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes offered a good risk-adjusted return profile for a global equity allocation.

“I like the terms of the notes. I’m fine with the tradeoff of not getting the dividends since you’re getting very attractive terms,” he said.

“Having two-times leverage in what we anticipate will be a slow-growth environment can really help.

“We think that corporate earnings will slow, so it’s beneficial to get the enhanced appreciation.”

Unlike purely bullish plays that offer little or no downside protection, the notes were designed for a conservative investor as well.

“I do like the 95% capital protection. You know that your losses are capped at 5%. In addition to that, the underlying index is a global benchmark, and as such, it is broadly diversified.

“It includes the U.S. but also Asia and Europe. I like the diversification.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes (Cusip: 61769H4W2) will price on Dec. 23.

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