Morgan Stanley IQ gives investors a boost

24 October 2011 5:25 pm

The six-year FTSE 100 linked plan provides positive returns if the FTSE 100 index falls by up to 50 per cent and also provides a cushion against bigger falls. Higher market volatility has made the pricing environment conducive to offering this product but the company does not know if future tranches will be possible, as pricing can change quickly.

Investors receive a fixed return of 60 per cent growth, plus a full capital return, provided the FTSE 100 index does not fall by more than 20 per cent over the term.

If the index does fall by more than 20 per cent, the plan’s booster feature will kick in. Instead of focusing on how much the index has fallen in percentage terms, the booster feature calculates index performance on the final value of the index relative to its initial value. This figure is then doubled to provide a total return. For example, if the index falls by 25 per cent, the final level of the index would be 75 per cent of its initial value. The booster feature would calculate the return as two times 75 per cent, which is 150 per cent. This would represent a full capital return plus 50 per cent growth.

When the index falls by more than 50 per cent, the booster feature will provide capital protection. For example, if the index falls by 60 per cent, the final value of the index will be 40 per cent of its initial value. Using the booster feature, this would produce an 80 per cent return and investors would lose 20 per cent of their original capital.

Many structured products reduce capital by 1 per cent for each 1 per cent fall in the index if a 50 per cent capital protection barrier is breached. These products may have the potential for higher maximum returns but would lose 60 per cent of investors’ capital if the index fell by 60 per cent.

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