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Investment Focus: Morgan Stanley UK Giants Selector Plan

Investment Focus: Morgan Stanley UK Giants Selector Plan

14 May 2013 / by Oliver Roylance-Smith

Investors looking to gain broad exposure to UK equities often turn 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.

This is why the latest offering from Morgan Stanley, the UK Giants Selector Plan, is a welcome new entrant – and early interest has been positive. We therefore take a look under the bonnet of this growth investment to find out why it is provoking such interest in the current climate. 

Who are the UK Giants?

The returns on offer are based on the performance of a ‘basket’ of shares. On 9th April 2013, Morgan Stanley recorded the largest 20 companies in the FTSE 100 Index by market capitalisation – these 20 companies together make up the ‘Giants’.*

Therefore, this investment offers investors exposure to only the biggest UK companies, which is potentially a factor driving the early interest in the plan – so how does the investment work?  

Best performing shares only

At the end of the investment, the performance of all 20 companies is reviewed. This performance is calculated by comparing the closing level of each share at the start of the plan with its closing level on the final day of the plan.

These returns are put in order from highest to lowest, and the highest 11 performers are then selected in order to calculate your overall return. Your return is equal to the average performance of these top 11 shares – if the average performance is zero or negative, you will not receive a return. 

Defined risk

As you would expect, many of the companies included are household names, including HSBC, BP, Vodafone, Tesco, and Barclays. Collectively, they offer exposure to a number of different sectors, from energy and financial services to insurance and telecommunications.

An investment in the Giants basket is, however, different from an investment in the FSTE 100 Index. As there are only 20 companies included in the initial basket, your risk is more concentrated, both in terms of companies and sectors, than the risk you would be exposed to by investing in the Index. 

The potential for high returns

Since the return on offer is based on the future performance of shares, the only way to get an idea of potential future returns is to use the past performance of each share in the Giants Basket to calculate the return that would have been generated over the last 6 years. This is often returned to as ‘simulated past performance’.

The returns are simulated between 19th April 2001 and 18th April 2007 (which gives us the last full 6-year investment term). When compared with the actual returns from the FTSE 100 Total Return Index (which includes dividend payments from the shares, reinvested into the Index), the UK Giants Selector Plan would have generated 227.34%** (equivalent to 14.67% AER) compared to 141.74% (equivalent to 5.99% AER). Your initial investment would also have been returned in full.

Please note that this is simulated past performance based on the 20 companies that make up the Giants Basket for the current investment (i.e. not necessarily the largest 20 at the time of past performance data). Past performance is no indication of future performance and should not be relied upon to make investment decisions. Please refer to page 8 of the brochure for more details. 

Some protection from a falling market

In addition to the potential return on offer, the other element of your final payment is the return of your original investment. Instead of being linked to the performance of the largest 20 companies, this is dependent on the performance of the FTSE 100 over the investment term. Some protection from a falling market, known as conditional capital protection, is also built into the plan.

This means that on the final day of the investment, provided the FTSE 100 is at or above 50% of its level at the start of the plan, you will receive the full repayment of your initial investment. If the value of the FTSE has fallen by more than 50%, then your original investment will be reduced by the same amount that the FTSE has fallen. This investment is not capital protected and so 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 solvency of the issuer of those securities (often referred to as the counterparty) becomes an important factor. If they are unable to fulfil their payment obligations (due to becoming insolvent), then 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 of 25th April 2013, Morgan Stanley had a credit rating of A- with a negative outlook. The ‘A’ rating denotes a strong capacity to meet its financial commitments but could indicate more susceptiblity to adverse economic conditions that companies in higher-rated categories, while the ‘-‘ rating signifies that 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. 

Investment term

The investment term of the plan is six years, which is usual for this type of investment. Although the plan can be sold prior to the end of the term, the proceeds you receive will depend on a number of market factors and could mean that you may receive less than your initial investment. Since the investment is designed to be held for the full term, it should only be considered by those who are able to invest their capital for six years. 

UK Giants – only the best performers… 

The ability to gain exposure to the best-performing largest companies in the UK over the medium term could be a compelling one for many investors, providing that they are prepared to put their capital at risk in order to receive the potential for high return.

Oliver Roylance-Smith, head of savings and investments at Fair Investment Company Limited, said: “The potential for high returns is one of the main attractions of investing in the stock market. But the opportunity to access the growth potential of only the best-performing largest UK companies might be even more appealing for those investors keeping an eye on the future economic prospects”  

* Although these companies remain in the basket even if they cease to one of the largest 20, there are a limited number of corporate actions which could affect the constituents of the basket – please refer to page 11 of the brochure for further information.
**source: Morgan Stanley 25th April 2013


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.