Morgan Stanley’s dual directional buffered PLUS on S&P set to outperform within ‘wide’ band

By Emma Trincal

New York, Nov. 2 – Morgan Stanley Finance LLC’s 0% dual directional buffered PLUS due Nov. 6, 2025 linked to the S&P 500 index can generate alpha in both a rising and declining market within a relatively wide range, a financial adviser said.

If the index gains, the payout will be par plus 175% of the index return up to a maximum return of 20%, according to an FWP filing with the Securities and Exchange Commission.

The payout will be par plus the absolute value of the index return if the index declines but by no more than the 20% buffer.

Investors will lose 1% for every 1% that the index declines beyond the buffer.

Outperformance

“A pretty plain-vanilla note,” said Steve Doucette, financial adviser at Proctor Financial.

“That’s for someone who thinks the market will be range bound for the next couple of years.”

If the final value of the index falls between minus 20% and positive 20%, the note would generate excess return over the benchmark, he said.

“That’s a wide range. You can outperform a lot, especially with the absolute return component,” he said.

Bad news, good news

As always, the “hard part” was to predict the direction of the market over the period.

“Four months ago, everybody was expecting a recession. Now, half of the market says we won’t have one,” he said.

The recession risk was an important factor behind the performance of the notes, he said.

“If we don’t have a recession, the Fed won’t cut the rates unless we’re well below their inflation target,” he said.

In such scenario, the market may be trading sideways, which would add value to the trade, he added.

“We could float along for the next couple of years with the economy in slow growth mode,” he said.

A recession on the other hand may ironically be the catalyst for a bull run, which would make the note unattractive because of the cap.

“The flip side of a recession is that the Fed will cut interest rates. After that, the market could be off to the races,” he said.

In such case, the notes would be likely to underperform, he said.

“If you’re bullish, this is not a good investment,” he said.

Absolute return

The downside payout was the most attractive piece of the structure. It’s within the first 20% of index decline that investors could do best, he noted.

“With the 20% buffer plus absolute return, you could significantly outperform,” he said.

Doucette said the notes could find a place in his portfolio.

“Either the index is up a little bit or down less than 20% and you will beat the market.

“I would never put all my large-cap exposure into this note. But a small piece would make sense,” he said.

Low cap

Matt Medeiros, president and chief executive of the Institute for Wealth Management, was not thrilled by the structure.

“This is a note for somebody who doesn’t want to give up exposure to the market,” he said.

“I wouldn’t be interested in this kind of security because even though the leverage is fairly high, the cap is too low.”

With the 1.75 leverage multiple and the 20% maximum return on the upside, investors can earn up to 9.54% on an annualized compounded basis. Such return may be achieved if the index grows by only 5.56% a year.

For Medeiros, earning at best 9.54% a year was too limiting relative to the historical performance of the S&P 500 index.

“If I was expecting 5% a year from the S&P, I wouldn’t take the equity risk. With a fixed-income note over the same term, I can get 8% to 9% per annum,” he said.

“I just think there is more predictability in a fixed-income note if you want to achieve the same or even a better result.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes will price on Nov. 3 and settle on Nov. 8.

The Cusip number is 61775MNF9.

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