Investment Focus: Morgan Stanley FTSE Defensive Bonus Plan

Investment Focus: Morgan Stanley FTSE Defensive Bonus Plan

04 September 2012 / by Oliver Roylance-Smith

Plans that have the ability to mature early and provide a competitive return on our investment, often at the 10%+ level, are always very popular with investors. With this in mind, we take a look at a current offering from Morgan Stanley which is provoking much interest in the current climate.

Proving popular

The FTSE Defensive Bonus Plan from Morgan Stanley is proving particularly popular with both existing customers and new investors. Many of our existing customers have investments that are likely to mature early in the coming weeks providing them with attractive returns as well as the opportunity to consider new investment opportunities.

For new investors, the headline rate of 10% is also proving a compelling opportunity in the current investment climate – so how does the investment work?

Early maturity

The term ‘kick out’ refers to the ability of the investment plan to mature early depending on the movement of the FTSE 100 Index. The Morgan Stanley plan has the potential to mature at the end of each year from year 2 onwards, if the Index meets the required level (see below).

Although this should be considered a full term investment, the ability to mature early is an attractive feature among investors, depending of course on your view of what will happen to the FTSE and when.

Defensive in name?

The use of the term 'defensive' in the title refers to the level the FTSE has to be above at the end of each year in order for your investment to mature. Provided the level of the index has not fallen by more than 10% from its value at the start of the plan, your investment will kick out.

This therefore provides a defensive element to your investment, since it will come to an end and provide the stated returns even if the market falls slightly. Since the majority of this type of investment released in the last few years have required the FTSE to be higher than its starting value, the recent levels of the index means this has proved to be an appealing feature.

High returns

In addition to the opportunity to mature early even if the market falls slightly, the other feature of this investment which has generated interest is the 10% headline return on offer.

The return is not compounded, but will be paid to you for each year the investment has been in place, thereby offering double digit returns even if the FTSE stays flat or goes down slightly. In these two scenarios therefore, this investment offers the potential to beat the market.

Return of your original investment

In the event that the investment does mature early then your original capital is returned to you along with the headline rate of 10% for each year. If the investment does not mature during the 6 year investment term then some protection from a falling market is also built into the plan - this is known as conditional capital protection.

This means that provided the FTSE has not fallen by 50% or more, your capital will be returned to you in full. Rather than this 50% ‘barrier’ being measured throughout the investment term it is measured on the last day of your investment only.

If the value of the FTSE has fallen by 50% or more, then your original investment is reduced by the same amount that the FTSE has fallen. This investment is not capital protected and therefore should only be considered if you are prepared to lose some or all of your initial investment.

Morgan Stanley as counterparty

Since your investment is used to buy securities designed to achieve the stated returns, the financial security of the issuer of those securities (often referred to as the counterparty) becomes an important factor, because if they are unable to fulfil their payment obligations (due to becoming insolvent) you may lose some or all of your investment.

Ratings agencies provide an insight into the credit rating of financial institutions and therefore allow a comparison of the credit risk associated with different companies and investments. Standard & Poor’s is one of three leading credit rating agencies.

As at 17th August, Morgan Stanley had a credit rating of A- with a negative outlook. The ‘A’ rating denotes a strong capacity to meet financial commitments whilst the ‘-‘ signifies it is at the lower end of this rating grade. The negative outlook indicates that the rating may be lowered in the short to medium term, i.e. in the next 6 months to 2 years.

Compelling balance of risk v reward

The defensive feature is proving popular with investors provided they are prepared to put their capital at risk in order to receive the potential returns on offer. In addition to the counterparty risk discussed above, the other main risk is that the FTSE may increase by a higher amount than the fixed returns offered by the plan – partly the trade-off for the conditional capital protection available.

Depending on your view of what will happen to the FTSE, the ability to provide healthy returns even if the Index stays flat, goes down slightly or goes up, is clearly an attractive proposition in the current climate and on balance offers a compelling investment in terms of risk v reward.

Closing early

The Morgan Stanley FTSE Defensive Bonus Plan has a minimum investment amount of £3,000 and is open for direct investments, ISAs and ISA transfers. However, you will need to act fast since we expect the changing economic conditions will make this investment extremely popular which may result in it having to close early.

Get more information about the Morgan Stanley FTSE Defensive Bonus Plan and apply »

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek professional advice.

This is a structured investment plan that is not capital protected and is not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.


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