Morgan Stanley’ 95% floored notes on Stoxx Select Dividend 30 aimed at conservative investors

By Emma Trincal

New York, Nov. 6 – Morgan Stanley Finance LLC’s 0% equity-linked partial principal at risk securities due Nov. 19, 2021 linked to the Euro Stoxx Select Dividend 30 index offer exciting terms for investors willing to give up high-paying dividends, advisers said.

The payout at maturity will be par plus at least 245% of any index gain. The exact participation rate will be set at pricing, according to an FWP filing with the Securities and Exchange Commission. Yield is 4.5%

If the index falls or remains flat, the payout will be par plus the return, with a minimum payout of $950 per $1,000 of notes.

Tradeoff

“They’re offering you two times uncapped leveraged return on the upside and losses limited to 5% on the downside if you agree to give up the dividends,” said Donald McCoy, financial adviser at Planners Financial Services.

“Your worst case scenario is if the market is flat. That’s the price to pay for a pretty significant downside protection.”

The Euro Stoxx Select Dividend 30 index tracks the performance of the 30 highest-dividend-yielding stocks selected from the Euro Stoxx index. Its dividend yield is 4.5%.

If the index rises modestly by less than 14% over the term of the notes, shareholders in a fund replicating the index performance should do better than investors in the notes by virtue of the yield, he noted.

Big moves

On the downside, investors will incur the first 5% of losses but 95% of their principal will be protected, the opposite protection of a 5% buffer, he noted.

Investors will outperform the shares if the index declines by more than 5% or if it’s up more than 14% over the three-year period. Above the 14% level, the “loss of dividends” is offset by the leverage effect, he said.

“If you are either quite bearish or bullish, this is a great vehicle. You just don’t want to be somewhere in the middle.

Investors who expect the market to trade range-bound should not buy the notes, he added.

“To me it’s very appropriate if you believe the index will move a lot, preferably on the upside.

“It’s also interesting given that we just went through a correction period.

“International markets, including Europe could be poised for a rally over the next three years and if it happens, you could see the notes outperforming the index significantly.

“If the market tanks, your exposure is only 5%.

“I think it’s a pretty decent note.”

Protection

Tom Balcom, founder of 1650 Wealth Management, said the notes appeared to be attractive. However the benefit to noteholders would depend on how the index generates most of its returns.

“It’s a pretty healthy structure: two times, no cap and this 95% protection,” he said.

“With a maximum loss of 5% this would be great for clients who are concerned about a global selloff.

“If we see a bear market with a 20% drawdown or more, investors would be very pleased with that downside protection.”

Index performance

For the upside, the potential for gains was more uncertain.

“It’s great to have no cap and to get this leverage. But this is a high-yielding index. If a lot of the returns are driven by the dividend yield, you could be at a disadvantage,” he said.

Three top sectors –financials, industrials and utilities –made for 62% of the index portfolio, he noted. The allocation to growth sectors such as technology was minimal.

“You’d have to look at the index and see to what degree dividends contribute to total returns,” he said.

While the downside protection is attractive, the index should go up sufficiently to generate enough in order to make up for the no payment of dividends, he also noted.

“You need to see a solid performance. So far the returns have been quite sluggish,” he said.

The index is down 7.5% over the past year and has lost 4.63% so far this year, according to Stoxx website.

“It’s a very decent note for the conservative client who is afraid of losing money. But you still have to do your homework on this index,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes (Cusip: 61768DQT5) will price Nov. 16 and settle Nov. 21.

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