Morgan Stanley’s PLUS with no cap tied to S&P/TSX 60 to fit into core strategy

By Emma Trincal

New York, June 22 – Morgan Stanley’s 0% Performance Leveraged Upside Securities due June 2020 linked to the S&P/TSX 60 index could be of use in the international bucket of a core portfolio, said Carl Kunhardt, wealth adviser at Quest Capital Management.

The notes offer exposure to the Canadian large-cap equity benchmark.

The payout at maturity will be par of C$1,000 plus 223% to 233% of any gain in the index, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will be exposed to any losses.

Concerns

“The note is attractive on some levels and concerning on others. But overall, I like it,” said Kunhardt.

“The price is in Canadian dollars. If the dollar appreciates and you convert the notes at maturity into dollars, it’s bad for you. So you do get to lose some of your return to the currency risk eventually.

“But the leverage above 100% should mitigate a lot of the currency issue.

“The other concern is the length, because this is an international index, which means there is more volatility. Five years is an awful long time.”

Core

Despite those two concerns, Kunhardt said he could still have a use of the notes in his portfolio.

“Usually I use structured notes as a hedge, as an alternative investment. That’s why I like protection.

“However, I can live without the barrier or buffer in this case.

“That’s because in my core portfolio, I’m still going to have exposure to international stocks. I’m never going to take that down to zero.

“If I use this as part of my international exposure, the lack of protection is not going to harm me given that if I had the position long, I wouldn’t have the protection anyway.”

Oil

Kunhardt said he was relatively bullish on Canadian stocks long-term as the economy of this country depends a lot on oil prices.

“The drop in oil prices obviously has hurt the Canadian economy since they’re such a large oil exporter,” he said.

“I am neutral on oil right now only because prices are coming back up so slowly. But long-term, I am absolutely bullish on oil. And that’s a good thing for the economy of this country.”

Single-country bet

Steven Foldes, vice-chairman of Evensky & Katz / Foldes Financial Wealth Management, had a less positive view.

He said that for a U.S. investor, there would be a currency conversion issue.

“Making a bet on the Canadian currency five years from now is a very tough bet. It’s outside of the realm of what we would be comfortable with,” he said.

“We typically don’t make country bets. That’s another thing that presents some challenges.

“When we purchase a structured note, we do like to have downside protection.

“The more than two-times leverage is nice. But it’s for a long-term note. There is no cap, but having a cap with this structure would be a non-starter. Even the upside as it is without a cap, for a five-year, we think is quite muted.

“It’s just one country. It’s a long period of time. There is no downside protection.”

Morgan Stanley & Co. International plc is the agent, with Morgan Stanley & Co. LLC handling distribution.

The notes will price in June.

The Cusip number is 61761JZX0.

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