Investment Focus – Morgan Stanley FTSE Income Accumulator
The need for income is at the forefront of every saver and investor, whether you are working and need to supplement your earnings, or retired and looking to add to your pension income. The need for income is one of the most common demands put on our capital and with the pressures we all face from low savings rates and challenging stock market conditions, we take a look at one particular solution that is proving popular with our income seekers.
Savers and investors versus the economy…
The economic landscape continues to challenge both savers and investors whilst those looking for income are affected as much as anyone. Interest rates remain at 0.5% as they come close to six years at this record low, and despite inflation recently falling to equal its record low of 0.5%, many salaries have been frozen and earnings are still struggling to keep up with the cost of living.
Combined with annuity rates offering low returns as a yield on capital and the need for income is clear, albeit a significant challenge for many. Against this difficult economic backdrop therefore, it is at least reassuring that there is an investment plan which on balance could make for a compelling option for income investors as well savers prepared to risk their capital in the hunt for higher returns.
In a nutshell
The FTSE Income Accumulator from Morgan Stanley is a relatively straightforward investment to understand. The plan recently re-launched and the latest issue offers investors a yield of up to 6.75% and has a fixed term of six years. Your capital is at risk if the FTSE 100 Index (the FTSE) is below 4,000 points at the end of the investment term. This is known as conditional capital protection and is one of this type of plan’s main differentiators when compared to UK equity income or other investment funds.
Potential for up to 6.75% income
This investment has already proved popular since its re-launch last week and one of the reasons is the potential headline yield of 6.75%. For each week the FTSE is between 5,000 and 8,000 points, income will be accrued with a payment being made each quarter. If the FTSE falls outside of this range on any weekly observation date, no income will be added for that week which means you would miss out on income during those weeks only rather than the whole quarter.
Should the FTSE remain within this lower and upper limit for each week during the quarter, the maximum income payment of 1.6875% will be made. This equates to an annual income of 6.75%.
Another popular feature is the quarterly payment frequency since this provides a regular opportunity to receive an income payment while a number of equity investment funds only offer twice yearly payments. Therefore, not only does the investment provide the potential for a competitive level of income, but it also pays this on a quarterly basis which could be attractive if you are looking for the opportunity to supplement existing income.
The FTSE Income Accumulator has a six year fixed term and although you do have the option to withdraw your money early and in this respect is not dissimilar to investment funds, the plan is designed to be held for the full term and early withdrawal could result in you getting back less than you invested.
The fixed term will though appeal to those who wish to plan around this and combined with the potential for a high yield and quarterly payments, this gives investors a clear picture of what the coming years could yield. With the economic landscape looking uncertain, particularly regarding any change to interest rates, this could well be a viable option.
Conditional capital protection
Another feature of this plan which sets it apart from other capital at risk income investments is the conditional capital protection. This means that provided the FTSE 100 Index does not fall below the 4,000 point barrier, you will receive a full return of your original investment. This works separately to the income accrual and unlike a number of other investment plans in the market, has the benefit of only being measured on the final day of the investment rather than on each day throughout the investment term.
In the event that the FTSE does finish below this level on the final day then your capital will be reduced by the same percentage as the fall in the Index. For example, if the starting value was 6,585 (today’s opening value) and finished at 3,951, you would only receive a return of 60% of your initial investment as the final value is 40% below the starting value and below the 4,000 point barrier.
Compared to investment funds
Although there are many attractive headline yields advertised by investment fund managers, it is important to remember that as with the FTSE Income Accumulator, these yields are not guaranteed and are subject to fluctuations. In addition, the treatment of your capital with investment funds is different to the Morgan Stanley plan since there is no conditional capital protection – your capital is fully at risk on a daily basis and can therefore go up and as well as down.
This is an important difference since the income yield and any rise or fall to your original capital should always be considered together since both have an effect on your overall return. For example a 6.75% income yield on an investment fund is compelling in its own right but not so if it coincides with a 6.75% reduction in the value of your capital. However, remember that this can of course work in your favour if capital growth is positive.
Compared to cash
Since this is an investment plan your capital is at risk. In this respect it is different to cash and the wide range of savings plans which offer to return your capital in full at the end of the term and are normally covered by the Financial Services Compensation Scheme in the event of default. This investment does, however, offer some protection against a falling market since your capital will be returned unless the FTSE is below 4,000 at the end of the term. In terms of treatment of capital therefore, this plan sits in between cash and investment funds.
Although there is not a market for six year fixed rate bonds there has historically been a healthy market for longer term fixed rates with five year fixed rates traditionally offering the higher returns as compensation for you committing your capital for longer. Unfortunately the market here has been steadily declining and so this investment therefore offers the opportunity to more than double the leading fixed rates available in return for putting your capital at risk.
Risk v reward
The principle of risk v reward means that the search for potentially higher returns 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.
Anything over 3% is currently market leading for a five year fixed rate bond and so by accepting risk to your capital, you have the opportunity to increase your income by up to 3.75% a year. With interest rates continuing at record lows, the savings market is failing to meet the need for higher income. The decision is therefore whether you are comfortable with putting your capital at risk and the conditional capital protection offered in return for a potentially higher level of income.
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 1st January 2015, 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).
Fair Investment conclusion
There is a significant choice when looking to generate an income from your capital with the level of risk you are prepare to take perhaps being the most important decision. When considering investment options, it is important to fully understand how each works and the risks that one takes on. Whether this is inflation risk, risk of capital loss or fluctuating yields, it should always be remember that it is the income and capital loss/rise combined that effect your overall return
Commenting on the plan, head of savings and investments at Fair Investment Company Oliver Roylance-Smith said: “Compared to other income alternatives available in the market, the Morgan Stanley Income Accumulator offers a compelling option. The headline yield is attractive and the cap on any income is balanced against the conditional capital protection thereby offering an attractive balance of risk v reward”. He concluded: “If you think the FTSE 100 may well remain between 5,000 and 8,000 points in the coming years, this plan could be an attractive opportunity in the hunt for high income.”
The plan is open for Investment ISAs, Cash ISA and Stocks & Share ISA transfers and non-ISA investments with a minimum investment of .
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 independent financial advice.
Tax treatment of ISAs depends on your individual circumstances and legislation which are subject to change in the future. ISA transfer charges may apply, please check with your provider.
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.