Investment focus: Morgan Stanley FTSE Defensive Kick Out Plan

Investment focus: Morgan Stanley FTSE Defensive Kick Out Plan

14 August 2013 / by Oliver Roylance-Smith

Investors looking to gain a broad exposure to the UK stock market often look to investments linked to the performance of the FTSE 100 Index. But with the Index continuing its run at historically high levels, many investors are finding it difficult to decide if now is the right time to invest.

Plans that have the ability to mature early and provide a competitive return on your capital are always popular with investors but those which can produce a return even if the FTSE goes down a little are proving particularly attractive in the current investment climate. With this in mind, we take a closer look at one of Morgan Stanley’s plans which offers the potential for high investment returns, even if the FTSE goes down by up to 5%.

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 have recently matured or are likely to mature early in the coming months providing them with attractive returns as well as the opportunity to consider new investment opportunities.

For new investors, the headline rate of 9% 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 Defensive Bonus Plan has the potential to mature at the end of each year from year 2 onwards, providing the Index meets the required level (see below).

Although this should be considered a full term investment, the ability to mature early could be 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 5% 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 has meant this has proved to be an appealing feature.

The potential for high returns

In addition to the opportunity to mature early even in a slightly falling market, the other feature of this investment which has generated interest is the headline return on offer at 9%.

The return is not compounded, but will be paid to you for each year the investment has been in place, thereby offering compelling 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.

Some protection from a falling market

As you would expect, in order to have the potential for such high returns your capital is at risk. The Defensive Kick Out Plan contains what is known as conditional capital protection which means that the return of your initial investment is conditional on the FTSE not falling by more than 50% of its starting value.

If the FTSE stays within this 50% barrier throughout your investment then you will receive a full return of your original investment but if it falls below this barrier, and also finishes lower than 95% of its starting value, your initial investment will be reduced by 1% for every 1% fall in the Index at the end of the plan. Although this provides some protection from a falling market, there is also the risk that you could lose some or all of your initial capital.

Defined risk versus defined returns

One of the features of this investment is that the potential returns are stated up front, prior to investing. This allows the investor to consider the potential upside in the context of the amount of risk they are taking since you know at the outset exactly what needs to happen in order to receive the returns as well as a return of your initial investment.

Risk versus reward

The principle of risk v reward means that the search for potentially higher returns inevitably leads to the need to put your capital at risk. A good benchmark for assessing your investment is to compare what you could get from a fixed rate deposit over a similar timeframe and then consider whether you are comfortable with the risk you are taking in order to receive the potentially higher return.

Leading five year fixed rates are currently offering around 3% and so by accepting risk to your capital, you are potentially increasing your returns by around 6% a year if the plan matures early or produces a return in the final year. The decision is therefore whether you are comfortable with putting your capital at risk and the conditional capital protection offered, in order to have the potential for higher returns and the opportunity to protect your capital against the effects of inflation.

Credit ratings and agencies

Unlike a fund, your investment is used to purchase securities issued by Morgan Stanley and so their ability to be able to meet their financial obligations become an important consideration. This is known as credit risk and means that in the event of Morgan Stanley going into liquidation, you could lose future returns and some or all of your initial investment and these investments are not covered by the Financial Services Compensation Scheme for default alone.

One accepted method of determining credit worthiness of a company is to look at credit ratings issued and regularly reviewed by independent companies known as ratings agencies. Standard and Poor’s is a leading credit agency and as at 18th July 2013, Morgan Stanley has been attributed an ‘A-‘ rating with a negative outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments but could be more susceptible to adverse economic conditions than companies in higher-rated categories while 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 (between 6 months to 2 years).

Morgan Stanley corporate profile

Morgan Stanley is a multi-national investment bank and asset manager with operations in 36 countries. Established in 1935, they are one of the largest global asset management businesses with asset under management of $341 billion (as at March 2013). They employ over 54,000 people in more than 1,200 offices around the world.

High potential returns even if the market falls a little

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.

Commenting on the plan, Oliver Roylance-Smith, head of savings and investment at Fair Investment Company Limited, said: “With the FTSE 100 Index currently at historically high levels, it is understandable why many investors are reluctant to commit to the market at this time.”

He continued: “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. The combination of the opportunity to provide highly attractive returns while offering some capital protection against a falling market is a compelling balance of risk v reward.”

The plan is open for new ISA investments (2013/14 allowance of £11,520) ISA transfers and non-ISA investments.

Click here for more information about the Morgan Stanley FTSE Defensive Bonus Plan »


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. Tax treatment depends on your individual circumstances and may change.

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.

© Fair Investment Company Limited