Morgan Stanley

Morgan Stanley Investment Management Enters UK LDI Market

Jul 3, 2006

Offers Pension Schemes a Solution to Asset Liability Mismatch

London —

Morgan Stanley Investment Management Limited ("MSIM") today announced the launch of the Morgan Stanley Liability Driven Investment (LDI) Alpha Plus funds, aimed at providing UK pension schemes with a practical investment solution to their asset liability mismatch.

MSIM will initially offer two funds - a 10-year product maturing in 2016 and a 25-year product maturing in 2031. The Morgan Stanley LDI funds offer investors a long-dated fixed rate return linked to UK interest rates and inflation. This fixed rate return is layered on top of the underlying performance of a fund of hedge funds, with an additional swaption feature to protect against a sharp rise in interest rates.

"Perhaps the most pressing issue facing pension schemes today is how to invest in a way that gives a due level of assurance that liabilities will be met, while also allowing the opportunity to grow assets at an attractive rate," commented Justin Simpson, Senior Portfolio Manager and Head of Structured Products & Derivatives in MSIM's Alternatives Division. "We believe the MSIM LDI Alpha Plus Funds offer a solution to this problem by combining a swaps programme, which neutralizes interest rate and inflation risk, with the uncorrelated returns from an alpha engine purpose-built for institutions."

In order to achieve their objectives, the funds combine three main features:

• Interest Rate & Inflation Risk management

By entering into interest rate and inflation swaps, each fund will provide an inflation-linked return, similar to that on a zero-coupon UK index-linked bond and a UK Gilt. The LDI Alpha Plus Inflation Protected Sterling 2016 Fund will enter into interest rate swaps and inflation swaps maturing in 2016, and the LDI Alpha Plus Inflation Protected Sterling 2031 fund will enter into interest rate swaps and inflation swaps maturing in 2031.

• Uncorrelated Alpha generation

The majority of the investors' principal will be invested in the MSIM Institutional Fund of Hedge Funds, which has been managed by MSIM's global Alternative Investment Partners team since 1991. The team invests in the best alpha-generating strategies and managers, without regard to asset class, to produce an innovative, market neutral, low volatility alpha portfolio.

• Protection against Rising Interest Rates

Some investors may be discouraged from investing in a liability matching structure at this point in time because they do not wish to lock into current low interest rates. To address this concern, the funds will have the flexibility to purchase an interest rate swaption, which will protect the funds against sharp increases in interest rates.

"We are excited by the opportunities presented by launch of these funds", said Richard Lockwood, MSIM Head of UK Business. "Our initial feedback from clients and consultants has been very positive, and the funds will play a key role in our strategy to offer UK institutional investors innovative and market-leading products."


Morgan Stanley

Morgan Stanley is a global financial services firm and a market leader in securities, investment management and credit services. With more than 600 offices in 30 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations.

Morgan Stanley Investment Management

The firm's investment management division, with over 400 investment professionals around the world, manages assets in excess of $440 billion and offers asset management services to a diverse client base which includes: governments, institutions, corporations, and individuals.

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