Defensive U.S. Large Cap Core Equity Strategy
Defensive U.S. Large Cap Core Equity Strategy

Defensive U.S. Large Cap Core Equity Strategy

 
 
 
Summary

Seeks to provide investors with core U.S. large cap equity market exposure, but in a more defensive way seeking lower volatility relative to the S&P 500 index.

The strategy seeks to achieve lower volatility through a systematically diversified portfolio of structured investments.

10-15
TYPICAL NUMBER OF HOLDINGSa
0.55%
MANAGEMENT
FEEb
 
 
Investment Approach
 
Core Equity Exposure

The Defensive U.S. Large Cap Core Equity Strategy seeks to provide investors with core U.S. large cap equity market exposure, but in a more defensive way seeking lower volatility relative to traditional equity investments. The strategy seeks to achieve lower volatility through active management of structured investments offering leveraged upside participation and a minimum 10% downside buffer. This outcome-oriented solution is meant to be used as a strategic allocation which seeks to complement asset class diversification1 as an additional risk management tool for the equity sleeve of client portfolios.

Outperformance Opportunity

The portfolio is designed and implemented to provide investors with a downside buffer as well as leveraged upside participation to a maximum performance cap, which may be beneficial during muted and down markets. The Strategy seeks to achieve this through a portfolio of 10-15 structured investments systematically diversified across maturities, initial strikes,2 buffers, cap levels, and issuers—all delivered to clients via the Separately Managed Account (“SMA”) vehicle.

Outcome-oriented Approach

The Portfolio Management Team focuses on delivering solutions to clients through an outcome-oriented approach3 driven by expertise in trading and investment experience in the structured investments space. Our process is further enhanced by Morgan Stanley’s investment, technology, and operations expertise. We pride ourselves on the ability to deliver the best of Morgan Stanley to every client.

 
 

Structured Investments may not be appropriate for all investors. Investors should carefully review the risks associated with these investments. They are not designed to be short-term trading instruments and involves risks that are not associated with investments in ordinary fixed or floating debt securities. In most instances, investors should be willing and able to hold a structured note to maturity, or risk selling the note at a discount or loss. Payments are subject to the credit risk of the issuer (and the guarantor, if applicable). In the event that the issuer of the structured note were to default, the investor could expect to lose 100% of their initial investment. Please refer to the important disclosures below for additional risk factors, which should be carefully read and considered.

 
 
Investment Process

All investment decisions for the Strategy utilize a systematic five factor framework to determine primary and secondary market buys as well as secondary liquidations. Strategy holdings are reviewed, monitored and analysed on a daily basis. Transaction costs and tax implications are also key considerations. This investment process includes, but is not limited to the following five primary factors:

1
Tenor selection
 

Seeks to find an optimal balance to maximize upside terms while minimizing duration.

2
Structural advantage
 

Monitor equity spot price to determine if structural advantage remains based on a set of dynamic thresholds.

3
Opportunity cost
 

Assess the trade-off between any potential foregone returns from a secondary liquidation vs. holding to maturity. 

4
Taxation
 

Actively consider holding period to drive long-term treatment for any realized capital gains vs. short-term treatment for any realized capital losses.

5
Execution cost
 

Perform pre-trade transaction cost analysis to ensure any potential gains from secondary liquidation are not eroded due to execution.

 
 

The information above describes how the portfolio management team generally implements its investment process under normal market conditions.

 
 
 
Portfolio Managers4  
Ron Bezoza
Head of the Managed Solutions Group
26 years industry experience
Nathan Sheldon
Executive Director
17 years industry experience
William Littleton
Vice President
10 years industry experience
 
 
Resources
Strategy Literature
 
As of 01/30/2020
 
As of 02/24/2020
 
 
 
 

A Number of holdings provided are a typical range, not a maximum number. The portfolio may exceed this from time to time due to market conditions and outstanding trades.  

B Wealth manager advisory fees and platform fees will apply and are not included in the investment management fee. Transaction costs are not included in the investment management fee but are included in the purchase price of the structured notes that the strategy invests in, and will therefore impact strategy performance. For additional information about the investment manager, please refer to the Form ADV provided by your wealth advisor. 

1 Diversification neither assures a profit nor guarantees against loss in a declining market.

2 Initial Strike refers to the closing level of the reference underlying index for the structured investment on strike date.

3 Approach targets a range of return or “payoff”, with an allowance for a defined range of risk at a specific point in time in the future. There is no guarantee any investment objective or target will be achieved.

4 Team members may change without notice from time to time.

 

IMPORTANT DISCLOSURES

S&P 500 Index: A market-capitalization-weighted index of the 500 largest U.S. publicly traded companies, widely regarded as the best gauge of large-cap U.S. equities.

Indexes do not include any expenses, fees or sales charges, which would lower performance. The indexes are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Volatility is a statistical measure of the dispersion of returns for a given security or market index.

RISK FACTORS

The Defensive U.S. Large Cap Core Equity Strategy invests in structured investments with leveraged upside (within a range of performance) and a minimum 10% downside buffer (the “leveraged upside securities”). An investment in the leveraged upside securities involves significant risks. We urge you to consult your investment, legal, tax, accounting and other advisors before you invest in the leveraged upside securities. Investing in the leveraged upside securities is not equivalent to investing directly in the underlier or any of the securities composing the underlier. Some of the risks that apply to an investment in the leveraged upside securities are summarized below, but we urge you to read the more detailed explanation of risks relating to the leveraged upside securities generally in the “Risk Factors” section of a leveraged upside securities prospectus supplement. You should not purchase the leveraged upside securities unless you understand and can bear the risks of investing in the leveraged upside securities.

The leveraged upside securities do not pay interest and provide a minimum payment at maturity of only a portion of your principal. The terms of the leveraged upside securities differ from those of ordinary debt securities in that the leveraged upside securities do not pay interest and provide a minimum payment at maturity of only a portion of your principal.. If the final underlier value is less than the initial underlier value by more than the buffer amount of 10%, the payment at maturity will be an amount in cash that is less than the $10 stated principal amount of each leveraged upside securities by a percentage equal to the percentage decrease from the initial underlier value to the final underlier value beyond the buffer amount. You may lose up to 90% of your initial investment in the leveraged upside securities.

The appreciation potential of the leveraged upside securities may be limited by the maximum payment at maturity. The appreciation potential of the leveraged upside securities may be limited by the maximum payment at maturity based on respective cap per each leveraged upside securities. The actual maximum payment at maturity will be determined on the pricing date. Although the leverage factor provides 200% exposure to any increase in the final underlier value as compared to the initial underlier value, because the payment at maturity will be limited to at least a max return of the stated principal amount for the leveraged upside securities, any increase in the final underlier value as compared to the initial underlier value by more than the cap (in the case where the maximum payment at maturity is a capped percentage of the stated principal amount) of the initial underlier value will not further increase the return on the leveraged upside securities.

The issuer might not be the parent company of a group, but might instead be a subsidiary whose leveraged upside securities are guaranteed by its parent company, in which case you should understand the guarantee, the potential remedies available to you against the issuer and the guarantor and the potential claims (including their ranking) and recoveries available to you against the issuer and the guarantor in a bankruptcy, resolution or similar proceeding. The leveraged upside securities are subject to the credit risk of the issuer (and the guarantor, if applicable), and any actual or anticipated changes to its credit ratings or credit spreads may adversely affect the market value of the leveraged upside securities. The leveraged upside securities are unsecured and unsubordinated debt obligations of the issuer, and are not, either directly or indirectly, an obligation of any third party. Any payment to be made on the leveraged upside securities, including any repayment of principal, is subject to the ability of each issuer to satisfy its obligations as they come due and is not guaranteed by any third party. As a result, the actual and perceived creditworthiness of the issuer may affect the market value of the leveraged upside securities and, in the event the issuer were to default on its obligations, you might not receive any amount owed to you under the terms of the leveraged upside securities.

Investing in the leveraged upside securities is not equivalent to investing in the underlier. Investors in the leveraged upside securities will not have voting rights or rights to receive dividends or other distributions or any other rights with respect to the securities composing the underlier.

The leveraged upside securities will not be listed on any securities exchange and secondary trading may be limited. The issuers intend to offer to purchase the leveraged upside securities in the secondary market but are not required to do so and may cease any such market making activities at any time, without notice. Even if a secondary market develops, it may not provide enough liquidity to allow you to trade or sell the leveraged upside securities easily. Because other dealers are not likely to make a secondary market for the leveraged upside securities, the price, if any, at which you may be able to trade your leveraged upside securities is likely to depend on the price, if any, at which the issuers are willing to buy the leveraged upside securities. In addition, the issuer may at any time hold an unsold portion of the leveraged upside securities (as described on the cover page of this document), which may inhibit the development of a secondary market for the leveraged upside securities. The leveraged upside securities are not designed to be short-term trading instruments. Accordingly, you should be willing and able to hold your leveraged upside securities to maturity.

The amount payable on the leveraged upside securities is not linked to the value of the underlier at any time other than the valuation date(s). The final underlier value will be based solely on the closing level of the underlier on the valuation date and the payment at maturity will be based solely on the final underlier value as compared to the initial underlier value. Therefore, if the value of the underlier has declined as of the valuation date, the payment at maturity, if any, may be significantly less than it would otherwise have been had the final underlier value been determined at a time prior to such decline or after the value of the underlier has recovered. Although the value of the underlier on the maturity date or at other times during the term of your leveraged upside securities may be higher than the closing level of the underlier on the valuation date, you will not benefit from the value of the underlier at any time other than on the valuation date.

Adjustments to the underlier could adversely affect the value of the leveraged upside securities. The sponsor of the underlier may add, delete, substitute or adjust the securities composing the underlier or make other methodological changes to the underlier that could affect its performance. The calculation agent will calculate the value to be used as the closing level of the underlier in the event of certain material changes in or modifications to the underlier. In addition, the sponsor of the underlier may also discontinue or suspend calculation or publication of the underlier at any time. Under these circumstances, the calculation agent may select a successor index that the calculation agent determines to be comparable to the underlier or, if no successor index is available, the calculation agent will determine the value to be used as the closing level of the underlier. Any of these actions could adversely affect the value of the underlier and, consequently, the value of the leveraged upside securities.

Hedging and trading activity by the issuer’s affiliates could potentially adversely affect the value of the leveraged upside securities. The hedging or trading activities of the issuer’s affiliates and of any other hedging counterparty with respect to the leveraged upside securities on or prior to the pricing date and prior to maturity could adversely affect the value of the underlier and, as a result, could decrease the amount an investor may receive on the leveraged upside securities at maturity. Any of these hedging or trading activities on or prior to the pricing date could potentially increase the initial underlier value and, therefore, the value at or above which the underlier must close on the valuation date so that the investor does not suffer a loss on their initial investment in the leveraged upside securities. Additionally, such hedging or trading activities during the term of the leveraged upside securities, including on the valuation date, could potentially affect the value of the underlier on the valuation date and, accordingly, the amount of cash an investor will receive at maturity, if any.

The market price of the leveraged upside securities will be influenced by many unpredictable factors. Several factors will influence the value of the leveraged upside securities in the secondary market and the price at which the issuer may be willing to purchase or sell the leveraged upside securities in the secondary market. Although we expect that generally the value of the underlier on any day will affect the value of the leveraged upside securities more than any other single factor, other factors that may influence the value of the leveraged upside securities include:

• the volatility (frequency and magnitude of changes in value) of the underlier;

• dividend rates on the securities composing the underlier;

• interest and yield rates in the market;

• time remaining until the leveraged upside securities mature;

• supply and demand for the leveraged upside securities;

• geopolitical conditions and economic, financial, political, regulatory and judicial events that affect the securities composing the underlier and that may affect the final underlier value; and

• any actual or anticipated changes in our credit ratings or credit spreads.

The value of the underlier may be, and has recently been, volatile, and we can give you no assurance that the volatility will lessen. You may receive less, and possibly significantly less, than the stated principal amount per leveraged upside securities if you try to sell your leveraged upside securities prior to maturity.

The estimated value of your leveraged upside securities is expected to be lower than the initial issue price of your leveraged upside securities. The estimated value of your leveraged upside securities on the pricing date is expected to be lower, and may be significantly lower, than the initial issue price of your leveraged upside securities. The difference between the initial issue price of your leveraged upside securities and the estimated value of the leveraged upside securities is expected as a result of certain factors, including the estimated cost that the issuer may incur in hedging its obligations under the leveraged upside securities, and estimated development and other costs that may be incurred in connection with the leveraged upside securities.

The estimated value of your leveraged upside securities might be lower if such estimated value were based on the levels at which our debt securities trade in the secondary market. The estimated value of your leveraged upside securities on the pricing date is based on a number of variables, including internal funding rates. Internal funding rates may vary from the levels at which benchmark debt securities trade in the secondary market. As a result of this difference, the estimated values referenced above might be lower if such estimated values were based on the levels at which benchmark debt securities trade in the secondary market.

The estimated value of the leveraged upside securities is determined by reference to pricing and valuation models of the issuer or an affiliate of the issuer, which may differ from those of other dealers and is not a maximum or minimum secondary market price. As a result, the secondary market price of your leveraged upside securities may be materially different from the estimated value of the leveraged upside securities determined by reference to internal pricing models.

The estimated value of your leveraged upside securities is not a prediction of the prices at which you may sell your leveraged upside securities in the secondary market, if any, and such secondary market prices, if any, will likely be lower than the initial issue price of your leveraged upside securities and may be lower than the estimated value of your leveraged upside securities. The price at which you may be able to sell your leveraged upside securities in the secondary market at any time will be influenced by many factors that cannot be predicted, such as market conditions, and any bid and ask spread for similar sized trades, and may be substantially less than our estimated value of the leveraged upside securities. As a result, the price at which the issuer may be willing to purchase the leveraged upside securities from you in secondary market transactions, if any, will likely be lower than the price you paid for your leveraged upside securities, and any sale prior to the maturity date could result in a substantial loss to you.

The temporary price at which we may initially buy the leveraged upside securities in the secondary market and the value we may initially use for customer account statements, if we provide any customer account statements at all, may not be indicative of future prices of your leveraged upside securities.

The rate the issuer is willing to pay for securities of this type, maturity and issuance size is likely to be lower than the rate implied by the issuer’s (or the guarantor’s, if applicable) secondary market credit spreads and advantageous to it. Both the lower rate and the inclusion of costs associated with issuing, selling, structuring and hedging the leveraged upside securities in the original issue price reduce the economic terms of the leveraged upside securities, cause the estimated value of the leveraged upside securities to be less than the original issue price and will adversely affect secondary market prices.

The calculation agent, which may be an affiliate of the issuer, will make determinations with respect to the leveraged upside securities.

The U.S. federal income tax consequences of an investment in the leveraged upside securities are uncertain. There is no direct legal authority regarding the proper U.S. federal income tax treatment of the leveraged upside securities, and we do not plan to request a ruling from the Internal Revenue Service (the “IRS”). Consequently, significant aspects of the tax treatment of the leveraged upside securities are uncertain, and the IRS or a court might not agree with the treatment of the leveraged upside securities as described by the issuer in the relevant offering documents. If the IRS were successful in asserting an alternative treatment for the leveraged upside securities, the tax consequences of the ownership and disposition of the leveraged upside securities could be materially and adversely affected. In addition, in 2007 the Treasury Department and the IRS released a notice requesting comments on various issues regarding the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. Any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in the leveraged upside securities, possibly with retroactive effect.

There is no assurance that a strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that market values of portfolio securities will decline and that the value of underlying securities may therefore be less than what you paid for them. Market values can change daily due to economic and other events (such as natural disasters, epidemics and pandemics, terrorism, conflicts and social unrest) that affect markets generally, as well as those that affect particular regions, countries, industries, companies or governments. It is difficult to predict when events may occur, the effects they may have (e.g. adversely affect the liquidity of the portfolio), and the duration of those effects. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy is subject to additional risks, including, but not limited to:

General Investment Risk: Investments may be speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment.

Investments can be highly volatile and may engage in leverage and other speculative investment practices, which can increase investment loss.

Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). Prices tend to be inversely affected by changes in interest rates. Longer-term securities may be more sensitive to interest rate changes.

Issuer Risk: The value of a security may decline for reasons related to the issuer, such as earnings stability, overall financial soundness, management performance and reduced demand for the issuer’s goods or services.

Diversification does not eliminate risk of loss. When comparing asset classes, keep in mind that each has differences and that all investments involve risks, including the possible loss of principal.

The risks of investing in the Strategy may be intensified because the Strategy’s investments may be concentrated in securities of a limited number of issuers. As a result, the performance of a particular investment or a small group of investments may affect the Strategy’s performance more than it would if the Strategy held securities of a larger number of issuers.

Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance.

The strategy may invest in illiquid securities, which may be difficult for the strategy to sell at a reasonable price. There may be no secondary market and there may be restrictions on redemptions, assigning or otherwise transferring investments.

While the investment manager generally will seek to achieve, over a full market cycle, the level of volatility in the portfolio’s performance as described, there can be no guarantee that this will be achieved; actual or realized volatility for any particular period may be materially higher or lower depending on market conditions. In addition, the investment manager’s efforts to manage the portfolio’s volatility can be expected, in a period of generally positive equity market returns, to reduce the portfolio’s performance below what could be achieved without seeking to manage volatility and, thus, the portfolio would generally be expected to underperform market indices that do not seek to achieve a specified level of volatility.

Zero coupon securities are more sensitive to interest rate changes than comparable interest-paying securities.

A DECISION TO INVEST SHOULD ONLY BE MADE AFTER READING THE STRATEGY DOCUMENTATION AND CONDUCTING IN-DEPTH AND INDEPENDENT DUE DILIGENCE.

The document is a general communications which is not impartial and has been prepared solely for information and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Morgan Stanley is a full-service securities firm engaged in a wide range of financial services including, for example, securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. Morgan Stanley Investments Management, Inc. is a direct or indirect, wholly owned subsidiary of Morgan Stanley.

The views and opinions expressed are those of the investment team at the time of writing and are subject to change at any time due to market, economic, or other conditions, and may not necessarily come to pass. These comments are not representative of the opinions and views of the firm as a whole.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.

 

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