Morgan Stanley uses G7 bonds to guarantee fund

Morgan Stanley has announced plans to launch a five-year income fund based on the FTSE 100 index, using G7 government bonds to mitigate the counterparty risk.

The FTSE 100 Accumulated Income Fund 1 pays semi-annual income payments to investors based on the FTSE falling between 3,200 and 7,500 (intended range), capped at a maximum of 3.37%. If the index falls outside this range then the payments will be adjusted accordingly.

Investors will receive 100% of their initial investment provided the index stays above 3,200 for the duration of the investment. If the index closes at or below this level on any day during the term,  capital is reduced in value by 1% for each 1% drop in the final level from the initial level.

The fund enters into a swap to mitigate the counterparty risk of Morgan Stanley. This is done by investing in G7 government bonds. The fund is marked to market daily, and any rise in the price of the fund is swapped into bonds. G7 makes the bonds Ucits III compliant as this spreads any risk linked to the government bonds into potentially seven countries.

"Our OEIC wrapper minimises investors' credit risk to Morgan Stanley," explains Nicholas Coghill, managing director at Morgan Stanley. "We could post equities or cash as collateral, but people want government bonds. People are comforted that the collateral is realisable in the case of bankruptcy. They want collateral they understand and know and they understand G7 bonds."

The product is marketed to institutional managers, and Coghill expects it to do well. "The growth product was very popular so I imagine this will be too. People are looking for income products and it is difficult to get attractive income. This product gives investors a good chance of getting income given the wide range on the FTSE. For discretionary managers it is also popular because they can invest via offshore bonds."