Morgan Stanley’s $5 million jump securities on S&P 500 seen as mildly bullish

By Emma Trincal

New York, July 14 – Morgan Stanley Finance LLC’s $5 million of 0% dual directional trigger jump securities due July 9, 2027 linked to the S&P 500 index offer investors a modest range of potential outperformance versus the benchmark, leading advisers to suggest return-enhancement features.

If the index return is positive, the payout at maturity will be the greater of par plus the index gain and par plus 41.5%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive a 1% gain for each 1% loss in the underlying index if the index declines but finishes at or above the 70% downside threshold and will lose 1% for every 1% decline if the index ends below its downside threshold.

Low expectations

Steve Doucette, financial adviser at Proctor Financial, said he needs to be able to outperform the underlying anytime he buys a note. In this case, the odds of outperforming were limited, he said. Aside from modifying the payout on the upside, he recommended replacing the barrier by a buffer.

He first examined the digital payout.

“You’re not very optimistic with this note. It’s nice that you’re not capped above 41%. But if it’s up more than 41%, you’re just long the index, you’re not outperforming the index,” he said.

The probabilities of enjoying the benefit of the digital payment were small, he added.

“The only way you’re going to outperform, is if the index is up less than 41% five years from now. That’s what I call a not-very-optimistic view... The only way you can capitalize on this note, is if the S&P goes up 8% a year for five years.”

Downside protection

Doucette was not impressed by the barrier in relation to the duration of the investment.

“We’re all going to be in real trouble if the market is down 30% five years from now,” he said.

The long duration was also a concern.

“You’re locking yourself up in a five-year note hoping that the market won’t go up more than 8% a year.

“And if it’s up 30% in one year or two, you’re not going to redeem this note at its full value. You should be able to sell it to the issuer in the secondary market. But you won’t get the full value. You never do.”

Doucette said the upside payout would need to be changed in order to increase the odds of a positive outcome.

“Give me some leverage instead of the digital. Or move up the digital,” he said.

The downside protection feature would also have to be altered.

“I want to be able to outperform on the downside. When I buy a note, I want some level of outperformance in whatever direction.”

Doucette said he would rather have a 10% buffer instead of the existing barrier.

“I love buffers. No matter how much the index falls, you’re always going to outperform. You can’t say the same about barriers.”

Barrier’s value

Another financial adviser also expressed dissatisfaction with the barrier based on the duration of the product.

“I don’t expect the S&P to be down in five years, let alone down 30%. Within such a long timeframe, the odds of a negative return are historically low,” he said.

“The 41.5% digital looks nice but it’s over five years, so that’s not much of a gain.”

In the midst of a bull market, the 70% barrier would be more valuable, he noted. But it was not the case in the current bearish environment.

“We’re already down 20% this year. There is just too much downside protection and not enough room for the upside,” he said.

Revising the upside

Any index increase above the 41% minimum return would cause the notes to underperform the index since investors do not receive dividends, he explained. The dividend yield of the S&P 500 index is 1.7%. As a result, the performance of the notes would be lagging that of the benchmark by about 8%.

Focus on the upside

This adviser also suggested changing some of the terms before considering investing.

His first option would be to keep the structure as is but to raise the digital.

“Get a higher digital and then, one-to-one,” he said.

The second solution, which he favored, was to keep the digital at the same level but to introduce leverage on the upside.

“I’d get the 41% return or a levered upside, whichever is higher,” he said.

This second feature would be innovative and somewhat unusual, he admitted, but worth exploring with the issuer.

As a tradeoff, this adviser would agree to have full downside exposure.

“I could go without the barrier and without the absolute return. I don’t believe I’m going to need either one of them

“This should be a good tradeoff, hopefully allowing the issuer to purchase the necessary options necessary to enhance the upside.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Monday.

The Cusip number is 61774DXS1.

The fee is 1.25%.

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