Morgan Stanley’s trigger PLUS on Dow, Russell designed for non-directional long-term bet

By Emma Trincal

New York, May 22 – Morgan Stanley Finance LLC’s 0% dual directional trigger Performance Leveraged Upside Securities due May 31, 2023 linked to the worse performing of the Dow Jones industrial average and the Russell 2000 index help investors take a non-directional view over the long-term period, advisers said. Positive returns can be achieved both on the upside and on the downside as long as the market does not show extreme swings. Such outcome is structured by combining two popular features: high upside leverage and absolute return.

If both indexes finish above their initial levels, the payout at maturity will be par plus 350% of the return of the worse performing index capped at par plus 70%, according to an FWP filed with the Securities and Exchange Commission.

If either index declines but both close at or above their 70% trigger levels, the payout will be par plus the absolute return of the worse performing index.

Otherwise, investors will be fully exposed to the loss of the worse performing index.

Range bound view

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, pointed to the benefits of the non-directional view. But he was less comfortable with the structure itself due to its “complexity.” He also found the security hard to allocate in a portfolio.

“My view of the market is not all that optimistic. I think stock prices are overvalued. I don’t see much upside left in five years. As a result, I’m not too concerned about the 70% cap,” Chisholm said.

The notes offer an annualized maximum return of 11.2% on a compounded basis, which is reached if the worst-performing index is up only 3.7% per year.

“You don’t have to be very bullish at all. That’s consistent with my perspective on the market,” he said.

If the market declines by less than 30%, investors gain.

“It’s attractive to have a positive return from a negative performance, no question about that,” he said.

“The trade itself is not bad at all.”

Hard to explain

However, Chisholm said he would not consider the notes.

“First, I’m not a big fan of worst-of. Who wants to explain a worst-of to a client? That doesn’t really put things in the best light.”

The two underlying indexes show a strong correlation, which reduces some of the risk.

The correlation coefficient is 0.85 with 1 being perfect correlation.

“It’s still a worst-of. You don’t know what you’re investing in,” he said.

He had other objections to the product.

“I just find it a little too complex. You have too many moving parts – the absolute return, the leverage, the cap, the worst-of. It’s not a simple one and therefore, it’s hard to explain to a client,” he said.

Difficult to allocate

Chisholm added that he was not comfortable with the product as an asset allocator.

“Because you don’t really know what your exposure is going to be at maturity, it doesn’t easily fit in any portfolio,” he said.

While the notes could go into a U.S. equity allocation, it would be hard to it break down, he added.

“Most U.S. equity allocations have large-cap, mid-cap, small-cap, value, growth...Where does it go to? You can’t determine what it is ahead of time.

“It’s got to be some kind of stand-alone thing. But building a portfolio is not about putting a piece that you hope will fit into any puzzle.

“I’m not saying it’s a bad note,” he said. “It’s valuable given the potential return.

“I’m just saying it’s complicated to understand and it’s complicated to integrate into a typical portfolio allocation.”

High probabilities of gains

Jonathan Tiemann, founder of Tiemann Investment Advisors, said he found the notes interesting.

“You have a pretty good chance of ending up 70% at maturity. They both have to increase more than 20% over five years. The odds are pretty much in your favor,” he said.

Investors would be at a disadvantage if there was a “big crash” or if the indexes surged over the period, he noted.

But the point of investing in the notes was precisely to express a subdued view of the market.

“Of course you’re giving up liquidity, dividends and you’re taking on Morgan Stanley credit risk...these are all the normal considerations coming up with a structured note,” he said.

But the product offered obvious benefits to investors.

The 70% cap for instance, which can be achieved with very small gains in the index, would be in the same ballpark as the past five-year performance recorded by the indexes in the midst of the bull market, he noted.

“70% wouldn’t be a terrible result for a five-year at all,” he said.

Buy-and-hold

For buy-and-hold investors, the notes could be easily part of an allocation.

“If you want to protect your core position, if you have 40% in U.S. stocks and you never want to go less than 25%, you put 10% to 15% of your U.S. allocation into something like that and forget about it.

“It’s a five year. That’s not short-term investing. But I have clients that have held positions for much more than five years,” he said.

In fact, the dual directional aspect of the product was viewed as a good match for that timeframe.

“For such a long period of time, you can’t really take a view. And that’s what this product allows you to do: invest your money without having to take a view,” he said.

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price on May 29 and settle on May 31.

The Cusip number is 61768C3F2.

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