Morgan Stanley Dynamic Balance Index

Transcription

1 Morgan Stanley Dynamic Balance Index

2 Return MORGAN STANLEY DYNAMIC BALANCE INDEX Morgan Stanley Dynamic Balance Index A rules-based index offering risk-controlled exposure to a broad range of asset classes Diversified exposure in a risk-controlled way The Morgan Stanley Dynamic Balance Index offers you dynamic exposure to a range of asset classes using a set of rules based on modern portfolio theory principles. Modern portfolio theory is based on the relationship between risk and return and, in particular, how to generate the maximum possible return for a given level of risk in your portfolio (i.e., an efficient portfolio). Creating and managing a portfolio based on these principles can be challenging and impractical. As an alternative, taking exposure to the Morgan Stanley Dynamic Balance Index can offer you the benefits of this approach in one index, which aims to achieve: Diversification: the Index provides exposure across equities, short-term treasuries, bonds, alternative investments and cash. Optimization: the Index uses modern portfolio theory principles to target the highest possible return for a given level of risk. Dynamic exposure: the Index is rebalanced on a monthly basis to account for changing market conditions. Stability: the portfolio of assets included in the Index are monitored daily, to attempt to keep volatility under control and help stabilize returns. The Index is calculated on an excess return basis, meaning that the index levels represent the performance of the portfolio in excess of the Federal Funds rate. A servicing fee of 0.50% per annum (calculated on a daily basis) is included in the published level of the Index. WHAT IS AN EFFICIENT PORTFOLIO 5% Efficient portfolios: where you target the maximum return possible for a given level of risk Portfolio with maximum return for 5% volatility Inefficient portfolios: where you get less than the maximum return possible for a given level of risk Portfolio used by the Index: where you target the maximum return possible for 5% realized volatility (based on historical returns) Illustrative only Risk (Realized Volatility) Note on Simulated Returns: Back-testing and other statistical analyses provided herein use simulated analysis and hypothetical circumstances to estimate how the Index may have performed between May 3, 1999 and July 1, 2015, prior to its actual existence. The results obtained from such backtesting should not be considered indicative of the actual results that might be obtained from an investment in the Index. The actual performance of the Index may vary significantly from the results obtained from backtesting. Unlike an actual performance record, simulated results are achieved by means of the retroactive application of a back-tested model itself designed with the benefit of hindsight and knowledge of factors that may have possibly affected its performance. Morgan Stanley provides no assurance or guarantee that any product linked to the Index will operate or would have operated in the past in a manner consistent with these materials. Actual results will vary, perhaps materially, from the simulated returns presented in this document. Because certain ETFs included in the sub-asset classes existed for only a portion of the back-tested period, substitute data has been used for portions of the simulation. Wherever data for one or more ETFs did not exist, the simulation has included the value of each ETF s benchmark index less the relevant current expense ratio. 2

3 Constructing the Index The Index is built according to a series of rules that determine the allocation to each asset class and Index Component. These allocations are dynamic, meaning that the Index is able to react to changes in market conditions over time and aim for more stable returns. While the weights allocated to each Index Component are set on a monthly basis on average, the overall portfolio is also monitored daily, to maintain a consistent level of risk. Why is dynamic allocation important? Many traditional investments offer constant exposure to a universe of assets. However, returns from these investments can be variable, as these assets might not have consistent performance in different market conditions. Dynamic allocation can help to achieve more steady returns, as the allocation to each asset will be adjusted across different parts of the market cycle. A SIMPLE THREE-STAGE PROCESS Create optimized portfolio: Upon each rebalance, we look at the performance, volatility and correlation of each Index Component to select a portfolio that aims to deliver maximum returns for a given level of risk. Apply maximum exposure limits: To ensure the Index is diversified, we impose allocations to each Index Component within certain exposure limits, and adjust the portfolio accordingly. MONTHLY REBALANCE* Apply 5% volatility target: We monitor the performance of the portfolio daily, adjusting exposure between the portfolio and cash to maintain a consistent level of risk. * There are four rebalancings each month on pre-determined dates. On each of these dates, one quarter of the portfolio will be rebalanced. Designed by Morgan Stanley Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, wealth management and investment management services. With offices in more than 43 countries, the Firm s employees serve clients worldwide including corporations, governments, institutions and individuals. Over the years, Morgan Stanley has created a wide range of rules-based indices, capturing different investment strategies to help investors find opportunities to enhance the performance of their portfolios. 3

4 What Are the Index Components? The Index provides exposure to a wide range of asset classes via U.S.-listed ETFs and Futures (the Index Components ). To ensure the Index remains diversified, maximum exposure limits are set at both the asset class level and at the individual Index Component level. ASSET CLASS MAXIMUM SUB-ASSET CLASS INDEX COMPONENT TICKER MAXIMUM ALLOCATION ALLOCATION TO TO ASSET CLASS INDEX COMPONENT Short-Term Treasuries 100% Short Term Treasuries 2-Year U.S. Treasury Note Futures Total Return Index 2 YR UST 100% Equities 100% US Equities SPDR S&P 500 ETF Trust SPY 50% Developed Market Equities ishares MSCI EAFE Index Fund EFA 50% Emerging Market Equities ishares MSCI Emerging Markets Index Fund EEM 50% B o nds 75% 20+ Year Treasuries Long Bond U.S. Treasury Note Futures Total Return Index Long UST 20% 7-10 Year Treasuries 10-Year U.S. Treasury Note Futures Total Return Index 10 YR UST 20% High Yield Bonds ishares iboxx High Yield Corporate Bond Fund HYG 20% Investment Grade Corporate Bonds ishares iboxx Investment Grade Corporate Bond Fund LQD 15% Investment Grade Bonds ishares Core Total U.S. Bond Market ETF AGG 5% A lternatives 50% Gold SPDR Gold Trust GLD 25% Real Estate ishares Dow Jones U.S. Real Estate Index Fund IYR 25% How diversified has the Index been historically? The below chart shows the average exposure the Index would have taken to different asset classes over different years historically, including for periods prior to the establishment of the Index on July 1, The shifts in allocations over time demonstrate how the Index strategy would have reacted to different market cycles, and reallocated between different asset classes accordingly, for example: During the market rally of , the Index would have had over 60% average exposure to equities, bonds and alternatives. However, in the credit crisis, the Index would have had a 50% 80% average allocation to cash and short-term treasuries. In the post-crisis recovery period from 2010 to present, the Index would have increased its exposure to riskier asset classes (equities, bonds and alternatives) once more. Source: Morgan Stanley / Bloomberg, Dec 31, Data is based on simulated allocations from May 3, 1999 to July 1, 2015 and actual allocations thereafter (please see page 6 for more information). 4

5 INDEX COMPOSITION MORGAN STANLEY DYNAMIC BALANCE INDEX How Does the Volatility Target Work? The Index aims to maximize returns across a diversified portfolio of assets for a defined level of risk. On each monthly rebalance, we select the portfolio of Index Components with the maximum possible return given a 5% annualized volatility. On a daily basis between rebalances, we monitor the volatility of this portfolio and adjust the exposure so that the targeted annualized volatility of the Index remains around 5%. This means that in higher volatility environments, the Index will take less exposure to the portfolio of Index Components and more exposure to cash. As volatility falls, the Index will take more exposure to the portfolio of Index Components (up to the maximum limit of 150%) and reduce the exposure to cash. The overall goal of this volatility target mechanism is for the returns of the Index to be smoother than they may otherwise be. What is the Exposure to the Portfolio of Index Components in Different Market Conditions? INCREASING VOLATILITY 3% REALIZED VOLATILITY 5% REALIZED VOLATILITY 10% REALIZED VOLATILITY MAXIMUM OF 150% EXPOSURE TO ASSET PORTFOLIO 100% EXPOSURE TO ASSET PORTFOLIO 50% CASH 50% EXPOSURE TO ASSET PORTFOLIO Source: Morgan Stanley, illustrative only Volatility Target Mechanism The aim of the volatility target mechanism is to stabilize the realized volatility of the Index to approximately 5%, but adjusting the allocation between the portfolio of Index Components and cash. Any reallocation between the portfolio of Index Components and cash resulting from the volatility target mechanism has to be at least 5%. The minimum and maximum exposure of the Index to the portfolio of Index Components are 0% and 150% respectively. The allocation to cash will be the difference between 100% and the actual exposure to the portfolio. What is Volatility? Volatility is a measure for how much the price of an asset has changed over time. An asset with low volatility will typically have a stable price, whereas an asset with high volatility will have a price that can fluctuate quite frequently and sharply. Higher volatility is therefore typically associated with higher risk. Historic volatility (also called realized volatility ) is calculated by looking at historical prices for an asset over a set period, and measuring how much these historical prices vary from the average historical price over that same period. Historically, realized volatility tends to be higher when markets are falling. The realized volatility of a portfolio can be decreased by reducing the allocation to volatile assets and replacing it with cash, which has close to no volatility. 5

6 Morgan Stanley Dynamic Balance Index Performance* The Morgan Stanley Dynamic Balance Index has displayed steady growth over different market cycles historically: Index Performance MSDB Index Return Annualized Volatility Sharpe Maximum Drawdown % 5.28% % % 5.38% % % 5.63% % % 5.33% % % 5.83% % % 5.29% % % 5.20% % % 5.35% % % 5.28% % Historical 1-Year Rolling Volatility % 5.08% % % 5.48% % % 5.58% % % 5.25% % % 5.29% % % 5.23% % * 5.84% 5.34% % 7 Year Trailing * 4.34% 5.31% % 5 Year Trailing * 2.75% 5.36% % 3 Year Trailing * 2.27% 5.26% % 1 Year Trailing * 10.79% 5.23% % * Annualized return Source: Morgan Stanley / Bloomberg, Dec 31, Data is based on simulated returns from May 3, 1999 to July 1, 2015 and actual returns thereafter. Past performance does not indicate future performance of the Index. All performance is indicative and may not be indicative of future performance of the Index. *INDEX PERFORMANCE (SIMULATED AND ACTUAL): How is the historical performance of the Index calculated? Back-testing and other statistical analyses provided herein use simulated analysis and hypothetical circumstances to estimate how the Index may have performed between May 3, 1999 and July 1, 2015, prior to its actual existence. The results obtained from such back-testing should not be considered indicative of the actual results that might be obtained from an investment in the Index. The actual performance of the Index may vary significantly from the results obtained from backtesting. Unlike an actual performance record, simulated results are achieved by means of the retroactive application of a backtested model itself designed with the benefit of hindsight and knowledge of factors that may have possibly affected its performance. Morgan Stanley provides no assurance or guarantee that any product linked to the Index will operate or would have operated in the past in a manner consistent with these materials. Actual results will vary, perhaps materially, from the simulated returns presented in this document. Because certain ETFs included in the sub-asset classes existed for only a portion of the back-tested period, substitute data has been used for portions of the simulation. Wherever data for one or more ETFs did not exist, the simulation has included the value of each ETF s benchmark index less the relevant current expense ratio. 6

7 Risk factors The following is a non-exhaustive list of key risk factors related to the Index. If you are considering purchasing or investing in a product linked to the performance of the Index, you should read and be aware of the risks inherent to this Index. You should also consult with your investment, legal, tax, accounting and other advisors prior to investing or purchasing such products. The Index may not increase in value due to a number of factors. The volatility of the Index could be greater than the target volatility. The volatility target may also dampen the performance of the Index in rising markets. It is possible that the Index may be composed of a very small number of ETFs at any time. Products linked to the Index involve risks associated with emerging markets equities, currency exchange rates and precious metals. The Index has a limited performance history and past performance is no indication of future performance. The Index is calculated on an excess return basis and has embedded costs. Purchasers of products linked to the index will have no access to the assets underlying the Index. Disclaimer Any product linked to the performance of the MSDB Index is not sponsored, endorsed, sold or promoted by Morgan Stanley & Co. LLC. or any of its affiliates (collectively, Morgan Stanley ). Neither Morgan Stanley nor any other party (including without limitation any calculation agents or data providers) makes any representation or warranty, express or implied, regarding the advisability of purchasing this product. In no event shall Morgan Stanley have any liability for any special, punitive, indirect, or consequential damages including lost profits, even if notified of the possibility of such damages. The Morgan Stanley Dynamic Balance Index (the Index ) is the exclusive property of Morgan Stanley. Morgan Stanley and the Index are service marks of Morgan Stanley and have been licensed for use for certain purposes. Neither Morgan Stanley nor any other party has or will have any obligation or liability to owners of this product in connection with the administration or marketing of this product, and neither Morgan Stanley nor any other party guarantees the accuracy and/or the completeness of the Index or any data included therein. No purchaser, seller or holder of this insurance product, or any other person or entity, should use or refer to any Morgan Stanley trade name, trademark or service mark to sponsor, endorse, market or promote this product without first contacting Morgan Stanley to determine whether Morgan Stanley s permission is required. Under no circumstances may any person or entity claim any affiliation with Morgan Stanley without the prior written permission of Morgan Stanley. Certain costs are deducted from the Index level on a daily basis. This reduces the potential positive change in the Index and similarly reduces the interest credited to any insurance product linked to the Index. The volatility control calculation applied by Morgan Stanley may reduce the potential positive change in the Index and thus will similarly reduce the return or interest credited to any insurance product linked to the Index. Investing in instruments linked to the Index is different than investing in the underlying Index components. 7

8 Since our founding in 1935, Morgan Stanley has pledged to do first-class business in a first-class way. These are the core values that guide every employee of our Firm: Putting clients first Always keep the client s interest first. Work with colleagues to deliver the best of the Firm to every client. Listen to what the client is saying and needs. Doing the right thing Act with integrity. Think like an owner to create longterm shareholder value. Value and reward honesty, collegiality and character. Leading with exceptional ideas Win by breaking new ground. Let the facts and different points of view broaden your perspective. Be vigilant about what we can do better. Giving back Be generous with your expertise, your time and your money. Invest in the future of our communities and our Firm. Mentor our next generation. 8