Morgan Stanley’s allocation notes tied to three indexes to ease portfolio allocation process

By Emma Trincal

New York, Jan. 11 – Morgan Stanley Finance LLC’s 0% allocation securities due Jan. 31, 2023 linked to a basket of the S&P 500 index, the Euro Stoxx 50 index and the MSCI Emerging Markets index offer an alternative to the typical global equity portfolio construction with a potential for alpha, a financial adviser said.

The notes are guaranteed by Morgan Stanley, according to a 424B2 filing with the Securities and Exchange Commission.

The best performing index will be weighted at least 80% in the basket, and the index with the second-best return will be weighted at most 20%. The index with the lowest return will have 0% weighting.

The payout at maturity will be par of $10 plus any basket gain.

Investors will be exposed to any losses.

Management tool

“It’s a very interesting note. It has a little bit of everything you need to build a global equity portfolio and it takes the guesswork out of it,” said Steve Doucette, financial adviser at Proctor Financial.

“You know you’ll be rewarded compared to buying directly these markets.

“You’re going to outperform a long-only portfolio because you’ll get less of the downside and more of the upside.”

“It’s kind of a neat concept to manage your asset allocation.”

Outperformance

For a while European stocks and emerging markets have been lagging the performance of U.S. equity, he noted.

“Now that they’re outperforming the U.S. you could pick up on it while still keeping your domestic equity exposure.”

Doucette stressed the difficulty of placing a five-year bet. But the weighting formula helps offset some of the risk associated with the absence of any downside protection, although it does not constitute a substitute for a true hedge.

“You could have the best one down and the second-best down even more. So you’re still ahead. Who knows five years out where the market will be? But at least you should outperform those asset classes taken separately,” he said.

Tactical feature

For Matt Medeiros, president and chief executive of the Institute for Wealth Management, the full exposure to the downside was too big of a drawback. Despite the allocation feature used for the basket at maturity, he would not consider investing in the offering.

“From my perspective, the payout formula is interesting,” he said.

“I like the tactical weight at the end. That’s appealing.

“I’m not sure I would buy it however. Without a buffer, I don’t see a good reason to invest in it.”

Liquidity

Medeiros said that giving up liquidity over a five-year timeframe without benefiting from a buffer was not something he would want to do.

“I think I could replicate it using the indices and some options without being locked up for five years,” he said.

“It’s probably less expensive.

“If this note had a buffer I would have a very different take on it.”

UBS agent

Similar allocation notes have priced in the past, but they are uncommon. According to data compiled by Prospect News, a number of previous deals have been distributed by UBS Financial Services Inc., the agent on this deal.

Last year, UBS priced five offerings of allocation securities on behalf of HSBC USA Inc. for a total of $5.63 million.

The Morgan Stanley deal will price on Jan. 26.

The Cusip number for the notes is 61768M238.

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