This structured product produces 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 six-year term.
The plan’s booster feature will kick in if the index falls by more than 20 per cent. This feature calculates index performance on the final value of the index relative to its initial value rather than the percentage of the fall. This figure is then doubled to provide a total return. So if the index falls by 30 per cent, the final level of the index would be 70 per cent of its initial value. The booster feature would calculate the return as two times 70 per cent, which is 140 per cent. This would represent a full capital return plus 40 per cent growth.
When the index falls by more than 50 per cent, the booster feature will provide capital protection. If the index falls by 65 per cent, the final value of the index will be 35 per cent of its initial value. Using the booster feature, this would produce a 70 per cent return and investors would lose 30 per cent of their original capital.
As at April 30, 2012, Morgan Stanley’s plan is unique. Many other six-year FTSE-100 linked plans available to intermediaries that provide a defined level of return do so on a kick-out basis. Kick-out plans from Barclays’ and Investec Structured Products allow the index to fall by up to 10 per cent without impacting on returns. These plans may have more appeal to some investors than Morgan Stanley’s because there is a chance to exit with some growth and original capital before the six years are up.
Morgan Stanley’s booster feature provides greater protection from index falls over six years than the other plans, but kick-out structures reduce the likelihood of a product running full term.