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Gilt-backed opportunity from Morgan Stanley

Morgan Stanley IQ – FTSE Gilt Backed Growth Plan 9

Type: Capital-protected bond

Aim: Growth linked to the performance of the FTSE 100 index

Minimum-maximum investment: £3,000-no maximum, Isa £10,680

Term: Six years

Return: 14% growth plus capital at the end of year two, 21% growth plus capital at the end of year three, 28% growth plus capital at the end of year four, 35% growth plus capital at the end of year five or 42% growth plus capital at the end of year six. Investors can choose to continue with the plan until year six if the kick-out feature is triggered by index performance

Protection: Original capital returned in full at the end of the term provided the index does not fall by 50% or more without returning to at least its initial value by the final day of the term

Closing date: July 22, 2011, July 15, 2011 for Isa transfers

Commission: Initial 3%

Tel: 020 7425 9000

This is Morgan Stanley’s latest gilt-backed growth plan, which differs from the previous issue by offering a potential kick-out from year two rather than the first year.

Chelsea Financial Services Head of Investment Products Matthew Woodbridge finds the product literature clear and easy to understand. He says: “This is a six-year auto-call plan which offers investors a potential early return from the second anniversary. The level of the FTSE 100 is recorded on the second anniversary and if it is level or higher than it was at the beginning, it matures and a coupon of 14 per cent is added to the original capital. If the level of the index is lower than the start level, the product will continue for another year and assessed again with a coupon of 7 per cent payable for each year the plan is in force.”

Woodbridge points out that the returns are taxed as a capital gain, as opposed to income, which means that investors who do not normally utilise their CGT allowance could still get all or part of their returns tax free.

“This is potentially very attractive to higher rate taxpayers, especially those with an income of £150,000 or more who are subject to the 50 per cent rate of income tax.”

Woodbridge adds that the commission payable is initial 3 per cent, which he sees as standard adviser remuneration for a six-year structured product.

“Unlike most auto call plans, this does not automatically pay the return out, the client can elect not to receive the proceeds until the end of the six-year term for tax planning purposes – but investors won’t benefit from any growth in the index during the remainder of the investment term,” says Woodbridge.

He thinks counterparty risk is lower than most other structured products as Morgan Stanley will purchase UK gilts to hold as collateral. “The risk is with the UK government defaulting instead of an investment bank. In addition, so long as the index remains above 50 per cent of its start level throughout the term investors will receive their original capital back at maturity,” says Woodbridge.

He thinks the product is likely to attract investors who want to receive pre-determined returns even if the index is flat over the period.

Turing to the potential drawbacks, Woodbridge says: “This product should be viewed as a six- year investment with the potential to mature from the second anniversary.

“Any growth in the index above the coupon level is not passed on to the investor but this is standard among structured products. No dividends from the Index are payable but this is also standard among structured products.

“The client’s capital is not protected at maturity if the index has breached the 50 per cent barrier at any time during the investment term and not just at maturity.”

The main competition will come from the latest Walker Crips Annual Growth Plan according to Woodbridge. The plan has an AA rated counterparty – HSBC – which offers the same potential coupon of 7 per cent a year as Morgan Stanley plan, but could mature on the first anniversary.

“Some other kick-out plans are offering higher potential coupons but with that comes added investment risk. Meteor has launched the top 10  kick-out plan which offers a potential coupon of 15.5 per cent  for each year held, payable on the first anniversary on which eight or more of the share prices of the ten largest companies by Index weighting listed on the FTSE 100 Index close at, or above, their corresponding initial prices,” says Woodbridge.


Suitability to market: Good
Investment strategy: Average
Adviser remuneration: Average

Overall 7/10


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