Morgan Stanley links barrier note to gold; capital-protected product could attract newcomers, adviser says

By Kenneth Lim

Boston, Oct. 21 - Morgan Stanley's principal-protected barrier notes linked to the price of gold could be an interesting product for risk-averse investors who are bullish on the metal, an investment adviser said.

Morgan Stanley plans to price zero-coupon capital-protected barrier notes due Oct. 31, 2011 linked to the price of gold.

If the price of gold never goes above 150% of its initial level during the life of the notes, at maturity investors will receive par plus the final gold performance. Investors will receive at least par. If the price of gold exceeds the 150% barrier on any day during the life of the notes, investors will receive par plus an amount, to be decided at pricing, that will fall between $200 and $220 per $1,000 note.

Notes suit risk-averse

The notes are suitable for investors who are looking for low-risk instruments, the adviser said.

"Principal-protected products, as long as the issuer has a good credit, are usually attractive to investors who don't want too much risk," the adviser said. "A lot of principal protected products are in essence alternatives to CDs or cash, because they offer the potential for greater returns while leaving your capital safe."

Investors who are seeking exposure to gold for the first time could find the product interesting, the adviser said.

"If you want exposure to gold, this could be considered for first-timers because it's principal protected," the adviser said. "The risk of losing your capital isn't that great, and the cap is 150% if the barrier's not breached, plenty of basis points for most people."

Underperformance a risk

The Morgan Stanley product's main risk is underperformance, the adviser said.

"If the price of gold doesn't cross the barrier and it falls below the starting price, then the investor incurs an opportunity cost because he gets no yield in the end," the adviser said. "If the price of gold crosses the barrier, the investor gives up that extra yield because the return is capped at 20% to 22%."

Although the note will return 20% to 22% as long as the barrier is breached, even if the price of gold subsequently falls below its initial level, the adviser said the scenario was unlikely to occur.

"For that to happen, gold has to go up to more than 150% and then lose basically one-third of its value within three years," the adviser said. "That's not something you're likely to see. Of course, if that happens, the investor makes a good profit, but again, I don't think that's likely."

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