Type: Capital-protected bond
Aim: Growth linked to the performance of the FTSE 100 index
Minimum-maximum investment: £3,000-no maximum, Isa £5,100
Term: Six years
Return: 120% of the growth in the index at the end of the term
Protection: Original capital returned in full at the end of the term regardless of the performance of the index
Closing date: March 23, 2011, March 16, 2011 for Isa transfers
Commission: Initial 3%
Tel: 020 7425 9000
This plan is one of two products that mark Morgan Stanley IQ’s debut in the structured deposit market.
Discussing the product’s suitability to the market, Julie Smith says: “With uncertainty in the market, the protection of hard-earned capital is often at the forefront of investors’ minds. Consequently, many investors will be looking for somewhere to put their money with a similar risk profile to that of a bank or building society account but with the possibility of a higher return.
“This six year structured deposit plan benefits from capital protection if held to maturity and offers a return of 1.2 times any growth in the FTSE 100 index” She adds that the plan benefits from no upper limit to growth potential.
Smith points out that the final index level is averaged on a monthly basis over the last year of the plan. “This will protect the investor from any sudden falls in the level of the FTSE 100 near the end of the term. Conversely, in a rising market any growth will be constricted due to this averaging,” she says.
Another positive highlighted by Smith is the potential to diversify counterparty exposure. “The deposit taker is Lloyds TSB Bank, which is relatively new to the structured product market and has an S&P rating of A+ with a stable outlook,” she says
Smith notes there are several ways to invest, either directly, through a cash Isa or cash Isa transfer as well as a self-invested personal pension, small self-administered scheme, and a company or charity investment. She feels that Morgan Stanley’s literature is clear and easy to understand, as usual.
Discussing the less attractive features of the plan, Smith says: “To gauge whether this type of plan is competitive, a general rule of thumb would be to look at fixed rate bonds to determine the risk reward ratio.” She concedes that fixed rate bonds are not a direct comparison, but finds them a useful way to put the returns from the Morgan Stanley IQ plan in to context.
“Currently, there are a number of fixed-rate bonds in the market offering rates in excess of 4.5 per cent AER over a five year period. Therefore, for this plan to beat these fixed rates, the FTSE 100 Index would need to rise by over 20 per cent by the end of the term.”
Smith points out that if the index falls or stays the same, no growth payments will be received. Capital will be repaid in full, but this will have been eroded by inflation and Smith feels this is something to consider at a time when inflation is increasing.
Smith says: “The comparison with fixed-rate bonds is not exact as timelines are not exactly matched and no account has been taken of the tax efficient wrapper available with the Morgan Stanley plan. That said, by considering returns available from fixed-rate bonds which give a defined return not linked to any index, you can make an informed decision of whether the extra risk by linking any returns to an index is worthwhile.
“In this case, you may be better off in cash if you are unsure if markets will grow in excess of 20 per cent over the six-year term.”
Smith feels that fixed rate bonds such as Coventry Building Society’s 4.75 per cent five-year fixed rate bond could provide the Morgan Stanley plan with competition. She also suggests capital protected deposit structured products such as the Investec FTSE 100 five-year deposit plan 24, which offers a fixed return of up to 35 per cent if the final level of the FTSE 100 index is higher than the starting level.
Summing up Smith says: “Morgan Stanley’s plan has a straightforward deposit structure and is easy to understand. This plan benefits from uncapped growth potential and may appeal to those who believe the market is going to rise over the six-year period but who are not confident enough invest directly into equities.
Suitability to market: Average
Investment strategy: Average
Adviser remuneration: Good