Morgan Stanley’s $339,000 trigger jump securities on S&P 500 to offer uncapped digital

By Emma Trincal

New York, Oct. 31 – Morgan Stanley Finance LLC’s $339,000 of 0% trigger jump securities due Oct. 27, 2025 linked to the S&P 500 index allow investors to outperform in a range bound market while maintaining an uncapped exposure if the market continues to rally in the next few years above the fixed payout. Investors are granted a barrier on the downside but have to be comfortable with a longer-than-usual holding period with no call option, according to a 424B2 with the Securities and Exchange Commission.

If the index finishes at or above its initial level, the payout at maturity will equal par plus the greater of the index return and the upside payment of 50%.

If the index falls by up to 30%, the payout will be par.

If the index finishes below its 70% downside threshold, investors will be fully exposed to any losses of the index from its initial level.

No cap

Having a digital payout, which does not cap the upside, was an advantage, said Steve Doucette, financial adviser at Proctor Financial.

“Six years out, we can have a bear market and if the market is up at the end, you get your 8% annual guaranteed. If the market screams out, you’re long the market; you’re not missing out on anything,” he said.

“On the downside you have this 70% barrier. I can’t imagine you’re going to finish down more than 30% after six years. Statistically, it seems improbable.”

The straightforward structure looked attractive at first. But six years is a long tenor, he said. To get the benefit of the digital return of 50% without a cap, investors have to agree to the long tenor and give up any leverage.

Riding a bear

“I’m trying to think of who would want to do that. Someone who doesn’t believe the market can go up by much more than 8% a year in the next six years,” he said.

While predicting the direction and growth of the market over such a long period of time is impossible, Doucette said that the view reflected in the terms was perhaps a little too pessimistic.

“You could have a double-dip bear market like in the 1930s. But it was based on a severe depression. That Great Depression was one that was never repeated,” he said.

“Not so say something catastrophic like that couldn’t happen again. But based on normal market cycles with bear markets shorter than two years on average, it’s very unlikely.”

Investors considering the notes could have either a very bearish outlook, or may just see the market moving range bound during a long period of time.

“If you’re concerned about muted growth, you should consider leverage,” he said.

“The leverage would help you outperform regardless.”

Note 2:0

Doucette said that for that maturity, he would be modifying the terms by reinforcing the return enhancement features, maintaining the uncapped exposure on the upside and keeping the barrier on the downside even if it has to be higher.

“I may cut some of the barrier size, get 75% instead of 70% for instance. Ultimately, the goal is to get some leverage on the upside,” he said.

He would be looking at a 1.25 upside leverage factor.

He said he would seek to maintain, while reducing it, the minimum return and apply the leverage on top of it.

“I’d get a 75% barrier, a minimum return of 20% and above that, get my upside levered up at 1.25x with still no cap,” he said.

If he was forced to choose between the digital and the leverage, he would pick the latter.

“You want to outperform. What if the market is up 70% in six years?”

The notes as they are would provide a market return of 70% in such case. With his leveraged version, investors would score a positive return of 87.5%.

“You would outperform by 17% with the leverage. “Six years out...I want leverage.”

Moderate expectations

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes fit his market outlook.

“The S&P has been one of the best indices over the last 10 years. As a result, our return expectations are much lower than what the average return has been over the last decade,” he said.

The total return of the S&P 500 index over the past 10 years has been 13.63%, according to Morningstar.

The Institute for Wealth Management predicts a much more muted performance in the 5% to 6% range on an annual basis, he said.

“The 50% minimum return of the note is very attractive. It exceeds our expectations over the next six years,” he said.

Having both the digital “jump” feature and the downside protection was another positive element.

“I think the 70% barrier is sufficient for that length of time. It’s relatively attractive relative to the standard deviation of the S&P,” he said.

Thoughtful management

The need to keep exposure to the market while playing defense is greater than ever with the S&P 500 index recently touching new highs, he said.

“More people should be looking toward notes like these because of where we are in the market cycle and the direction of rates,” he added.

This adviser did not see the long tenor as a drawback.

“The S&P will continue to be a core to most portfolios. You need the exposure to the U.S. markets. But you also need a more thoughtful way to hold a core positon long term.

“It’s not just about owning the S&P. The terms have to reflect your view if you want to thoughtfully manage your portfolio.

“Whether it’s the S&P with a buffer or the S&P with absolute return, getting defined outcomes make more sense today than five years ago.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes (Cusip: 61769HWS0) settled on Oct. 25.

The fee is 0%.

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