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15.5% per annum - That'll do nicely!

by Ian Lowes, founder of StructuredProductReview.com

Last month I wrote about a recent Morgan Stanley FTSE 100 linked structured product maturity in my portfolio which produced a 50% gain after 3 years, the Morgan Stanley Kick-Out Growth Plan 12. I also referenced the next in the series, number 13, which was also in my portfolio and on track to mature on its third anniversary at the end of October, provided the FTSE 100 was at least 10% higher over the investment term. I had the option of selling out a month before the scheduled potential maturity date and realise a 52% gain, but I chose to hang on and was rewarded for this action.

The journey was not however, plain sailing! As you know, in terms of stock market movements, October was somewhat of a volatile month. The Morgan Stanley Kick-Out Growth Plan 13 would mature provided the FTSE was above 6,109 and at the beginning of October, when the index stood at 6,622, this looked like a reasonable expectation. But stock markets are far from predictable and by the middle of the month, my decision not to sell out early was arguably a little questionable. Whilst the FTSE did not close below the 6,109 level at any point during the month, during the day of 16 October the Index did fall below this level - as far as 6072.7. At that point, the possibility that the maturity trigger would be missed became a stark reality. Thankfully however, over the subsequent days the market stabilised and on the all-important third anniversary the FTSE 100 was 14.6% higher, resulting in my investment maturing with a 55% gain. Certainly not to be sniffed at! Of course, if the target had not been achieved on this anniversary, the investment would continue for another three years and mature with a gain equivalent to 150% of the rise in the index over the six years.

We have Lowes clients invested in issue 14 of the Morgan Stanley Kick-Out Growth Plan and those that are invested are on target for the best maturity yet. Of the thirteen issues of this Morgan Stanley plan that have reached their third anniversary, only two failed to trigger an early maturity. Issue 14 will mature on its third anniversary later this month as long as the FTSE is above 5903. If it is, the investment will produce a very healthy 65% gain. That’s more than 18% per annum without putting capital at risk of loss from market movements, except in the event that the third anniversary maturity trigger is missed and the FTSE falls to below 2,684 at the end of 2017. It’s not impossible, but if you think that’s likely, then maybe you should be investing in some chickens, sheep and a shotgun and running to the hills!

But of course, let’s not forget about counterparty risk! Morgan Stanley, along with Lehman Brothers and RBS, was one of the banks that Lowes Financial Management avoided during 2008 and 2009 as the banking crisis took hold. We did not expect one of these institutions to fail, but the risk and uncertainty became too great to justify exposing clients to new investments backed by these banks. The first issue of the Kick-Out Growth Plan, launched in early 2010, was in fact the catalyst to accepting Morgan Stanley back on our panel and whilst the risk of a bank defaulting will always exist, our decision has proved correct to date. All that said, it must be accepted that if the counterparty to a structured product does fail, then the invested capital could be lost. However, if a major bank does fail, then it will not only be structured products in your investment portfolio that are impacted, as unfortunately many investors experienced during the financial crisis.

The returns of the Morgan Stanley plan show that structured products are a valuable contender for a place in investors’ portfolios. While we always say that past performance is not a guide to the future, this maturity gives a clear idea of their potential. But appreciate that similar products out today may not prove as profitable – we’ll know when they mature.