Morgan Stanley US Mid Cap and Japan Defensive Autocall Plan - May 2023

Please read this guidance in conjunction with the supporting fact sheet and key investor information document (KIID) enclosed.

A structured product is a fixed-term contract, providing a return based on the performance of an underlying share or stock market index.  Inherently, a structured product is designed to limit investment losses while still creating a return to investors.  Some structured product investments offer a degree of capital protection, while others do not.  The growth is usually not guaranteed, and you may not achieve a return on your investment.  Even where there is capital protection, the deduction of fees and charges could mean you receive less than you invested.

It is important to mention that a new structured product is not suitable for people who require access to their money invested during the potential term of the product.  Early redemption can be part of the whole amount invested but investors may receive less than the original sum invested.

The Morgan Stanley US Mid Cap and Japan Defensive Autocall Plan May 2023 will pay a return of 20.5% (10.25% per annum) plus initial capital if the Russell 2000 and Nikkei 225 indices are at or above 97.5% of their respective start date levels on the first observation date of 30 May 2025.  The start date for this plan is 31 May 2023.  If one or both indices is below 97.5% of its start level, the plan continues to the next annual observation date, and the potential return increases by a further 10.25% each year until the plan matures or the final observation date of 31 May 2029 is reached.

The early maturity or autocall barrier level of 95% or above of the index start levels applies for year 3, reducing to 92.5% for the following year, 87.5% for the next year, until lastly 85% for the final observation on 31 May 2029.

This plan also has an element of capital security, whereby if the worst-performing of the Russell 2000 and Nikkei 225 indices as of 31 May 2029 has not fallen by more than 40% from the start level on 31 May 2023, all the investor’s capital is returned.

The capital protection for this plan is dependent on Morgan Stanley fulfilling its obligations, along with the investment being held until maturity, unless there is a prior autocall.  The initial capital is used to purchase securities issued by Morgan Stanley that have similar characteristics to investing in corporate bonds.  In the unlikely event of default, investors will be creditors of Morgan Stanley.

Morgan Stanley has been rated ‘A-‘ by Standard & Poor’s as of 15 March 2023.  Standard & Poor’s is an independent credit rating agency that uses a scale to denote creditworthiness, ranging from ‘AAA’ (highest) to ‘D’ (lowest).  Issuers within the ‘A’ rating band are described by Standard & Poor’s as having strong capacity to meet their financial commitments but more susceptible to the adverse effects of changes in circumstances and economic conditions than those issuers rated ‘AAA’ or ‘AA’.  Further information about ratings can be obtained via the following website: www.spglobal.com/ratings/en/about/understanding-credit-ratings.

Initial capital is not 100% secure with this structured product.  If at maturity on 31 May 2029 the worst‑performing of the Russell 2000 and Nikkei 225 indices are below 60% of their initial level, the initial capital being returned will be reduced by any negative performance.  For example, if the Nikkei 225 index was 70% below its initial strike level, the initial investment would be reduced by 70%.  Therefore, the return of the original capital invested is not guaranteed.

While the tax rules and rates that are used within any current recommendation are up to date, the rules and rates can change at any time.  Mattioli Woods can accept no liability for any such changes and their potential effect on your investment.  The value to you of any tax benefits will depend on your personal tax position at the relevant time.

The value of investments and the returns from them can go down as well as up and you may not get back the amount you invested.  Past performance is not an indication of future returns and investments need to be considered as medium to long-term holdings.  Inflation will erode the purchasing power of your money.

There is no fixed cost for exiting this plan at maturity.  Please note, if you need to sell this plan prior to maturity, the issuing bank will endeavour to provide quotes under normal market conditions for trading purposes on request, subject to a bid-offer spread of 1%.  Please ensure you read the accompanying fact sheet.  Morgan Stanley has defined the holding period as ‘the recommended holding period for the product, which is until 14 June 2029 corresponding to the product’s final autocall payment date’.  Please also read the KID in relation to this statement.

Investing in multiple ISPs exposed to the same indices increases the risk to an investor should those indices suffer severe losses.  However, this risk is spread across a wide range of index levels and future dates, and will be mitigated by maturing structured products where autocall occurs.

We closely monitor this risk for existing structured products and whenever a new structured product is being considered, but should you have any concerns, please contact your consultant.

If you change your mind and do not wish to invest, please inform your Mattioli Woods consultant by 31 May 2023, the start date for the structured product.  After this date, you will only receive the value of the structured product when sold back to the product provider, which is likely to be less than your original investment.

Inflation is falling in the global economy, but some economists worry that strong wage growth will lead to stubborn inflation and therefore prevent interest rates returning to pre-pandemic levels as quickly as we might have expected.  This higher-for-longer environment, for both inflation and interest rates, may lead to underperformance from long duration assets such as tech stock and long-dated bonds (‘jam tomorrow’ investments).  We can also speculate as to which parts of the global stock market might perform relatively well.  US small cap stocks, and Japanese stocks in general, fall into this category.

The combination of sharp interest rate hikes from the Fed over the last year, and a likely restriction of credit availability from US banks following the March bank crisis, is likely to contribute to slower economic growth over the coming months in the US economy.  Smaller quoted companies, that are considered inherently more risky by banks, may be particularly affected by a dearth of credit.  This apprehension has contributed to a steady underperformance of the US small cap sector relative to both their large cap peers, and against the NASDAQ index of tech companies, over the last twelve months.  We consider current price levels to be an attractive entry point and are willing to take the risk of any further near-term underperformance in order to secure longer-term gains.

The Russell 2000 is a broad-based index, covering all sectors, which offers investors a high level of diversification.  Notably, it reduces the worry that ‘higher for longer’ inflation and interest rates might lead to difficulties for growth sectors, such as tech.  The tech weighting of the Russell 2000 is around 13%, compared to around 29% in the S&P500 index (including Amazon) as at the end of March.

Japan’s stock market also benefits from a diversity of sectors, which makes it less dependent on global growth than it was when the main market was dominated by large exporters.  Valuations are attractive relative to its history and compared to US large cap and tech companies.  This means that Japan is likely to benefit from the much awaited re-balancing by US investors, i.e. selling Wall Street after a long period of outperformance, and buying into other developed stock markets that look relatively cheap.

The Bank of Japan’s policy of yield curve control is likely to be eased over the coming year.  This will allow Japanese bond yields to rise, leading a rally in the yen.  This may hurt the foreign earnings of Japan’s exporters but will probably be neutralised when the share prices are expressed in sterling terms.

You will note the key information document (KID) gives a risk score of 6/7 for this structured product.  This score is based on a snapshot calculation of the volatility and dividend positions of the underlying indices, at the time the KID was created.  All but one of the previous structured products we have distributed to clients had a summary risk indicator (SRI) or risk score of 5/7 or lower.  This higher rating is due to the use of a more volatile index, the Russell 2000 index, alongside the Nikkei 225.  The Russell 2000 Index is more volatile than most of the indices used previously, and higher volatility or uncertainty means a higher possibility of a negative return on this individual structured product (ISP).  However, our assessment of risk for the product is not based solely on that score.

Recent volatility on the Russell 2000 has created more nervousness than we think is appropriate, and we regard (relative) weakness in the two indices to be helpful, resulting in attractive entry points.  The year two to year six barriers allow the worst‑performing index to fall as much as 15% over six years, from their start levels, before the annual coupon is lost.  In addition, a capital at risk barrier set at 60% means the worst performing index must fall by more than 40% at the maturity of this structured product before any capital is lost.  This coupled with the wider context of the marketplace and our opinion on the economic outlook for the relevant indices, means we feel the risk level of this structured product sits in line with our previous structured product offerings.

A company called IDAD is employed on behalf of Mattioli Woods to conduct an auction with competing structured product providers.  IDAD also settles the trade with our custodian and provides all the supporting documentation required by the FCA.  To complete these tasks, IDAD charges a fee.  For the Morgan Stanley US Mid Cap and Japan Defensive Autocall Plan May 2023, IDAD’s fee is not expected to exceed 1%, with Morgan Stanley’s estimated fee of up to 1.81%.  The combined total of these fees cannot exceed 2.81% and, as noted, they are built-in to the return of the plan so do not reduce the amount invested.  For example, based on a monetary investment figure of £10,000, the fee would equate to £281.  This charge has been accounted for in arriving at the stated potential returns and will not be deducted from that figure when the plan matures.

Sienna Finance UK Limited is a Special Purpose Vehicle (SPV) used by Morgan Stanley to deliver returns where they are subject to capital gains tax (CGT), noting pension schemes are exempt of this tax.  Investors have no exposure to this SPV, as they hold the Note issued by Morgan Stanley.  Every issuer has this in place for CGT delivery purposes.

This product offers no FSCS protection.

For over 30 years Mattioli Woods has been at the forefront of providing advice, pension administration/ trusteeship, and investment products and services for clients across the country.  Its key aim is to put clients first to help them reach the objectives they set.  This is done with integrity and professionalism while maintaining a bespoke approach, and it continues with this ethos as part of its culture.

The Mattioli Woods website (www.mattioliwoods.com) provides a further history of the company and the products offered to achieve clients’ various requirements.

In terms of financial legislation, firms can be ‘independent’, or ‘restricted’, or both.

We offer our own discretionary portfolio management (DPM), self-invested personal pension (SIPP), personal pension (MW PP) and small self‑administered scheme (SSAS) services, as our investment managers, consultants and client relationship managers are specialists in these areas of advice and management.  For this reason, we are classed as a ‘restricted’ advice business and, only where it is suitable and in line with your objectives, we will recommend these solutions to you.  Should your circumstances not be best served by our own propositions, we will look to the wider market to source the most appropriate solution for you.

In addition, as part of our centralised investment proposition, we offer the Custodian Property Income REIT plc, which is a real estate investment trust managed by Custodian Capital Limited, part of the Mattioli Woods Group.

Our solutions are designed to meet your needs and where appropriate we can also offer advice on pensions, investments, and non-investment insurances (protection policies) from the whole market.

Mattioli Woods is committed to ensuring the principles of ‘treating customers fairly’ set by the Financial Conduct Authority are applied with integrity throughout all aspects of our business.

Any tax-based calculations completed by Mattioli Woods are for illustrative purposes only and we recommend you check these with your accountant or tax adviser.

Individual Savings Accounts (ISAs) are tax-efficient wrappers with the option to save via cash and/or stocks and shares, making them ideal for investors as there is nothing to include on tax returns.

Full details are included in the investment guidance booklet we provided you with and to which we would refer you.

As mentioned, you can draw funds from your ISA and replace the amount within the same tax year without losing the tax benefits or using up any further allowance in that tax year, specifically:

• ‘Flexible’ ISAs enable investors to draw cash from their ISA and subsequently replace this within the same tax year without it counting towards their annual subscription allowance.
• The replacement of cash must happen within the same tax year the cash is drawn.
• Any withdrawn cash not replaced before 5 April cannot be replaced and will be a new subscription counting towards the investor’s annual allowance.
• Payments to the flexible ISA will be counted first as repayments of any outstanding flexible withdrawals made in the current tax year and second as a subscription against the current year’s annual allowance.
• There is no carry over of either unused annual allowance or withdrawals between tax years.
• Repayments of withdrawn funds may only be made to the account from which the associated withdrawal was originally made.
• The full value of the ISA may be drawn but withdrawals must not exceed the total value of the ISA (overdrafts are prohibited), even when the amount available for withdrawal is less than the total of the current year’s contributions.