Morgan Stanley’s trigger PLUS on Dow, S&P and Nasdaq may be ideal for bulls, advisers say

By Emma Trincal

New York, Nov. 15 – Morgan Stanley Finance LLC’s $500,000 of 0% trigger Performance Leveraged Upside Securities due Nov. 17, 2023 linked to the Dow Jones industrial average, S&P 500 index and Nasdaq-100 index intrigued advisers for the uncapped leveraged upside exposure offered in a short-term bullet note.

If the return of the worst-performing index is positive, the payout at maturity will be par plus 151% of the gain in the worst-performing index, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the worst-performing index finishes below the initial level but ends at or above the 90% trigger level and will lose 1% for every 1% decline of the worst-performing index if it ends below the trigger level.

Super bullish

A financial adviser was surprised by the short duration of the notes.

“To get a 150% kicker on the upside, uncapped on a 12-month period, that’s really something,” he said.

“Usually, you can’t do it on a one-year. I think they were able to price it because of the worst-of but more importantly because of the skinny barrier. A 90% barrier is not very much at all.”

This gave the notes an aggressive profile.

“It’s a super bullish play. Obviously if you buy the notes, you don’t believe we’re going to have a recession. You’re not too concerned about the Fed. You may even expect rate cuts.

“The market went a little bit crazy last week when the lower inflation data came up. Many people indeed believe the market could jump back up,” he said.

Fee, worst-of

This adviser commented on the 0.1% fee disclosed in the prospectus.

“It’s ridiculously low. 0.1%. Can you imagine? On a $500,000 deal, the bank only gets $500. It’s staggering that this note can actually be written. Thank you, technology! They’re probably also getting some revenues from the options and the hedging. But just from a fee standpoint, it’s very low. That’s probably why you get such good terms,” he said.

This adviser said he does not rule out using worst-of in general as long as the underliers are broad-based indexes and not stocks. They also have to be highly correlated to one another.

The three underliers fit his criteria.

“It’s a worst-of. But the correlations between those three indexes is very high. I would venture to say, it’s above 90%,” he said.

He expected the Nasdaq-100 index to outperform the two other indexes and the S&P 500 index to be the second-best.

“The Dow is probably going to be the laggard,” he said.

“One risk is if you have a runaway performance on the Nasdaq or the S&P and a flat or slightly negative performance on the Dow...that would be very disappointing.”

Weak barrier

But a barrier breach would be worse, prompting this adviser to say that the protection should be improved.

“The 90% barrier is not going to give you a lot. It’s a little bit like buying a levered upside and rolling the dice.

“In a volatile market, you have a significant chance of blowing that barrier,” he said.

In a moderately negative market, however, the notes were likely to outperform a long-only position.

“With this product, you have some downside protection up to the first 10% of decline whereas a long-only position has no downside protection other than the dividend, which is not significant,” he said.

Only a specific type of investor with a high risk tolerance should consider the notes.

“For somebody who’s optimistic about the market and the economy, this is a great play,” he said.

“The indexes are well-known and correlated to one another. The fee is extremely low. The terms are good. The odds of outperforming the market are fair. It checks all the boxes.

“The only caveat is you don’t have a great downside protection. You buy it for the upside. You buy for the bull, not the bear.”

Compelling terms

Steven Foldes, wealth manager and founder at Evensky & Katz / Foldes Financial Wealth Management, who is bullish, said the notes were attractive.

“I like the structure. We’re comfortable with Morgan Stanley’s credit. The 0.1% fee is very inexpensive,” he said.

“I don’t love worst-of, but this worst-of is three U.S. large-cap indices that have a very high correlation among the three of them. Obviously, they could show a good disparity of returns, but they’re likely to move in the same direction.

“You’re getting uncapped leveraged exposure. That’s a very nice thing to have especially on a short-term note.”

The barrier however was the weak spot in the product.

Reshuffling the notes

“I could do away with the 90% barrier. Once it’s breached, it’s worthless. I would look at entirely eliminating the barrier and add more leverage on the upside,” he said.

“Alternatively, if I can’t get more upside, I would try and replace the 90% barrier with a 5% buffer. A buffer is real. The market is down 15% you only lost 10%.

“This is a note for a bullish investor on the U.S. economy 12 months from now. If you’re looking for protection, a 10% barrier is not worth much.

“The payoff doesn’t take away your chances of participating in a recovery. We like this type of uncapped structure. I would consider this product for our clients.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will settle on Wednesday.

The Cusip number is 61774HP77.

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