The Case for Active Management - - | Morgan Stanley · PDF fileThe Case for Active Management...
Transcript of The Case for Active Management - - | Morgan Stanley · PDF fileThe Case for Active Management...
The Case for Active Management
Lisa Shalett, Managing Director, [email protected], +1 212 296-0335 Zachary Apoian, Executive Director, [email protected], +1 212 296-1706 Joseph Pickhardt, [email protected], +1 212 296-7993 Lucy Yan, [email protected], +1 212 296-7193 Aili Chen, [email protected], +1 212 296-0719
January 11, 2017 From the Global Investment Committee
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Bottom Line: The Case for Active Management Is Strengthening • Quantitative Easing and secular stagnation provided a unique set of tailwinds (low volatility, tepid growth, and
high correlations) for indexing and passive management, that after seven years now appear poised to fade. While trailing performance deficits have driven outflows from active strategy and exacerbated its challenges, we strongly caution investors against assuming that active managers face permanent impairment.
• To the contrary, the GIC believes we are in the early innings of a major regime shift in markets driven by the
hand-off from monetary to fiscal policy; from deflation to inflation; and from low volatility to high volatility. These features strongly favor active managers and security selection, especially with the rising potential for “boom” and “bust” economic scenarios.
• Furthermore, our tactical quantitative framework, which has favored passive throughout 2016, may be in the process of shifting. Model indicators like rising market breadth, strong performance of factor strategies, falling macro sensitivity and recent declines in return correlations will be key to watch.
• “Smart-beta” strategies which attempt to replicate pure factor strategies (like value, momentum or low
volatility) are the next evolution in the active/passive debate. While their systematic approach may be a low-cost replacement for some active managers, we still believe that 35 to 40% of the top managers add idiosyncratic alpha over long periods of time and thus their investment selections can be additive to diversified portfolios.
• Our due diligence group provides resources and guidance around manager selection. Please reach out to your
Financial Advisor for more details.
Source: Morgan Stanley Wealth Management GIC
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Last 20yrs 2010-2016 2016
US Large Growth Russell 1000 Growth Index 46% 33% 23%US Large Value Russell 1000 Value Index 41% 35% 26%
US Mid-Cap Growth Russell Mid Cap Growth Index 45% 34% 39%US Mid-Cap Value Russell Mid Cap Value Index 39% 30% 45%US Small Growth Russell 2000 Growth Index 53% 41% 50%US Small Value Russell 2000 Value Index 52% 53% 13%Europe Stock MSCI Europe Index 54% 59% 29%Japan Stock MSCI Japan Index 55% 65% 77%
Emerging Markets MSCI EM Index 48% 49% 31%US Ultrashort Bond Barclays Govt/Corp 1 Yr Duration Index 47% 58% 76%
US Short-Term Bond Barclays US Govt/Credit 1-5 Yr Index 36% 43% 67%US Intm-Term Bond Barclays US Agg Bond Index 41% 48% 63%US High Yield Bond BofAML US HY Master II Index 40% 35% 6%
US Bank Loans S&P/LSTA Leveraged Loan Index 36% 37% 30%US Intm Muni Bond S&P National AMT Free Muni Index 40% 38% 17%
World Bond Citi WGBI USD Hedged Index 52% 59% 76%Global Real Estate S&P Global REIT Index 41% 23% 7%
US Real Estate FTSE NAREIT All Equity REITs Index 52% 40% 16%
% Active Managers Outperform
International Equities
Real Estate
Peer Group Benchmark
US Equities
Fixed Income
2016 Was Another Challenging Year for Active Management, Exacerbating the Debate After Five Years’ Underperformance
Average Percentage of Active Managers Outperforming Their Benchmarks By Asset Class
As of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Morningstar
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
14.50 14.80 14.7214.46
15.70 15.67 15.9716.45
14.16 14.14 14.4714.94
13.04 13.27 13.0213.47
11.84 12.03
11.3211.88
9.93 9.69
8.609.15
8%
10%
12%
14%
16%
18%
U.S. Large Cap Growth U.S. Large Cap Value U.S. Mid Cap U.S. Small Cap
Benchmark 5th Percentile 25th Percentile Median 75th Percentile 95th Percentile
Not Only Have Most Active Managers Failed to Beat Benchmarks, But Performance Dispersion Was Wide and Negatively Skewed
US Equity Mutual Funds: Five-Year Annualized Return1
As of December 31, 2016
Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC, Morningstar Note (1) Benchmarks for Large Growth, Large Value, Mid Core and Small Core are Russell 1000 Growth, Russell 1000 Value, Russell Mid Cap and Russell 2000 Index.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
(875)
932
57
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
Active US Equity ETF and Index Equity Total US Equity
The Result: Passive Management Has Grown Significantly This Cycle As Investors Pulled Funds From Active Managers
Domestic US Equity Cumulative Flows ($ billions)
As of October 30, 2016
Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC, Morningstar
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Based on Recent Results, Many Expect Growth in Passive Management to Continue. Can Active Management Recover?
Global ETF/ETP Assets Under Management ($ Trillions)1
As of July 12, 2016
0.0 0.1 0.1 0.1 0.2 0.3 0.40.6
0.9 0.81.2
1.5 1.51.8
2.42.7
3.0
3.5
4.2
5.0
6.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC Note 1) “Asset Management: Disruption Looms; How to Survive the Storm?”, Morgan Stanley & Co.,July 12, 2016 and BlackRock
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Superior Risk-Adjusted Returns of Passive Benchmarks Are Not Unprecedented—Recall 1983-1988 and 1995-2000
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
-3
-2
-1
0
1
2
3
1983 1986 1988 1991 1993 1996 1998 2001 2003 2006 2008 2011 2013 2016
Recession% of Large Core Managers Outperforming vs. Long Term Average (Right)Sharpe Ratio of a US 60/40 Portfolio
Active Outperforms: Collapse of the tech bubble, early 2000s recession and 9/11...
Active Outperforms: Financial crisis of 2007 - 2008
Active Outperforms: 17 consecutive interest rate hikes from 2004 to 2007...
Active Outperforms: Interest rate at a then-record low of 5%...
Sharpe Ratio of a 60%/40% Portfolio1 and Percentage of Large Blend Managers Outperforming vs. Long-term Average Rolling 3-Year data as of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Bloomberg, Factset 1) Sharpe Ratio of a 60% S&P 500 / 40% Barclays US Aggregate Portfolio. The Sharpe ratio is calculated by subtracting the risk-free rate─such as that of the 3-month US Treasury bill─from the rate of return for a portfolio and dividing the result by the standard deviation of the portfolio returns. Standard deviation (volatility) is a measure of the dispersion of a set of data from its mean.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
We Believe Active Management Can Recover Because Passive Management Has Benefitted From Tailwinds That May Be Fading
Low Volatility
Low Growth
High Correlations
Reduced Fiscal
Support
Passive Outperformance
Source: Morgan Stanley Wealth Management GIC
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
This Cycle Has Been Unique: Federal Reserve Intervention Suppressed Market Volatility, Removing Risk Management as a Source of Alpha
Federal Reserve Balance Sheet Size vs. One-Year Avg. VIX
As of December 31, 2016
0
5
10
15
20
25
30
35
40
45
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
Total Fed Assets ($B) 1 Year Avg. VIX (Right)
QE Starts QE Ends
Source: Morgan Stanley Wealth Management GIC, Bloomberg, Morgan Stanley & Co.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Volatility May Continue Rising Toward Historical Levels, Creating More Opportunities for Managers to Benefit From Potential Mispricings …
47.4%
39.2%
1.2%
4.4%
16.7% 16.7%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Last 20 Years Last 10 Years 2013 2014 2015 2016
Per
cent
of D
ays
wit
h V
IX A
bove
20
VIX Index Level
Percent of Days VIX is above 20, As of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Bloomberg
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
This Cycle Has Been Unique: GDP Growth Has Stalled This Cycle, Constraining Profits and the Ability of Companies to Differentiate …
$0
$20
$40
$60
$80
$100
$120
1952
1956
1959
1963
1966
1970
1973
1976
1980
1983
1987
1990
1993
1997
2000
2004
2007
2011
2014
0%
1%
2%
3%
4%
5%
6%
7%Real GDP Growth (left axis)S&P 500 4 Quarter EPS (right axis)
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
Bill
ions
of 2
009
Dol
lars
US Real GDP
US Real GDP at 3.1% Annual Growth Rate
Real GDP Is Below Trend
As of December 31, 2015
GDP Growth and S&P 500 Earnings Per Share
As of September 30, 2016
Source: Morgan Stanley Wealth Management GIC, Bloomberg, Haver Analytics
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
0%
10%
20%
30%
40%
50%
60%
70%
Trai
ling
12M
Cor
rela
tion
Pre-crisis Average: 20%
Post-crisis Average: 38%
Last 12 Months
... Correlations Have Declined From Recent Highs, Suggesting Stocks May Trade More Distinctly, Potentially Benefitting Stock Pickers ...
US Trailing 12M Correlation
As of December 31, 2016
27%
30%
33%
36%
Dec Feb Apr Jun Aug Oct DecJan
Source: Morgan Stanley Wealth Management GIC, Factset
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
6.5%
4.1%
0.6%
3.2%
1.3%
2.4%
-1.1%-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1950s 1960s 1970s 1980s 1990s 2000s 2010s
… And New Policies May Reverse the Contraction in Government Spending, a Potential Boost to Growth and Earnings
Real Government Investment and Consumption Spending Growth
January 1, 1950 – December 31, 2015
“The single best thing the federal government can do to promote economic growth is to repair and build [infrastructure]... It’s been neglected for 30 years.” Roger Noll, Emeritus Professor of Economics at Stanford and Senior Fellow at the Stanford Institute for Economic Policy Research, November 17, 20161
“ [I]ncreased fiscal stimulus can be predicted partly from Trump's campaign proposals for tax cuts and increased infrastructure and defense spending, but also from the reality that the Republican Party will control both the executive and the legislative branches.“ Justin Fox, Bloomberg News, November 9, 20162
Source: Morgan Stanley Wealth Management GIC, Bloomberg, Haver Analytics, New York Times (1) Taken from “Trump Size Idea for a New President: Build Something Inspiring,” by James B. Stewart, New York Times, November 17, 2016. (2) Taken from “A President Trump Fiscal Stimulus Is Coming,” by Justin Fox, Bloomberg News, November 9, 2016.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
With Odds of Economic “Boom” or “Bust” Increasing …
Higher Odds for a "Boom" Higher Odds for a "Bust"
InflationReflation may continue into 2017 as optimism concerning fiscal policy pushes global yields, inflation and earnings higher
Reflation could falter on a strong US Dollar, a slowing Chinese economy and a more hawkish Fed
Fiscal PolicyLooser US fiscal policy may raise the likelihood of better US growth. Europe could join fiscal stimulus and China's expansion could last longer
Aggressive US fiscal policy may encourage excess investment and leverage, bringing about a more rapid end to the cycle
Monetary PolicyFed allows inflation to "run hot" and policies seeking to steepen European and Japanese yield curves encourage private economic activity
Excessive slowing of European Central Bank easing or overly hawkish pace of Fed rate hikes
Trade PolicyImproving aggregate demand improves trade as threats to abandon existing trade agreements go unfulfilled
An escalation of protectionist sentiment that could weigh globally, especially EM
US DollarCurrency volatility remains contained; liquidity-starved nations remain unstressed by recent dollar strength
With a more hawkish Fed, the dollar could continue to strengthen, which could hurt US exporters and hamper global financial conditions
China GrowthStronger US/developed market growth, improving domestic demand could support Chinese recovery
Rising debt, declining investment, capital outflows or currency instability may pose threats
Political EventsGlobal populist pressure is channeled into growth-positive policies
Global populist pressure devolves into instability
Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC. Note 1): “2017 Global Strategy Outlook: Sparkle and Fade“, Morgan Stanley & Co., Nov. 27, 2016
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
… Investing With Active Management May Prove Prudent Today Given Potential Economic and Policy Outcomes
Economic Outcome Active or Passive?
Recession, due to slowed growth or other exogenous events
Active. Manager emphasis on quality factors and risk management may improve their likelihood of outperformance, as has been typical in low-return market periods
Slow but expansionary cycle continues
Passive. Difficult to outperform with fewer growth opportunities, limited ability for distressed value plays to fully recover. Coupling lackluster outperformance potential with limited potential downside market risks suggests correct focus is fee optimization
Cycle accelerates, delivering stronger economic growth
Active. Innovations or themes driving growth are likely to create differentiation among winning and losing companies and industries, a fertile ground for active managers
Policy Outcome Active or Passive?
Growing fiscal stimulus, including broad infrastructure spending, tax reform or cash repatriation
Active. Analysis may reveal company-specific benefits to after-tax earnings, which is likely to be focused in specific benefits to after-tax earnings, which, in turn, is likely to be focused in specific companies and industries
Prolonged monetary stimulus, including stable or decreased federal funds rate and expanding Fed balance sheet
Passive. Prolonged, excess liquidity has driven asset prices across markets rather than focused on company-specific merits or fundamentals
Excess monetary tightening, including aggressive Fed funds rate hikes or balance sheet contraction
Active. Active management may better discern companies with earnings able to navigate a more difficult financing landscape, potential threats of inflation or rising costs of capital
Source: Morgan Stanley Wealth Management GIC
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
78.3%
43.0%37.8%
33.3% 33.3% 33.3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Large Growth Momentum
Cap-Weighted
Equal-Weighted
Passive Benchmarks Tend to Overweight Risky Exposures, Making It Easier for Active Managers to Outperform in Down Markets
S&P 500 Cap-Weighted vs Equal-Weighted
As of December 31, 2016
Down Years
Up Years
All Years
Top 25% 6.0 1.0 2.4Median 0.9 -0.7 -0.6
Top 25% 8.1 3.1 5.3Median 1.3 -0.6 -0.5
Top 25% 10.7 3.9 6.9Median 3.1 0.1 0.7
Large Core
Small Core
Mid Core
Manager Style & Rank Among Peers
US Equity Mutual Funds: Last 20 Years Annualized Excess Return1
As of December 31, 2016, S&P500 Returned -5% Or Less Is Considered a Down Year
Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC, Morningstar Note: (1) Benchmarks for Large Core, Mid Core and Small Core are S&P 500, Russell Mid Cap Index and Russell 2000 Index
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Active Managers Have Been Able to Cushion Down Markets
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50
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80
90
-60% -40% -20% 0% 20% 40% 60%
% M
anag
ers
Out
perf
orm
ing
T12M
Russell 1000 Value Concurrent Period Returns
R² = 27.66%
Large Value: Manager Performance vs. Benchmark Return August 1, 2006 –December 31, 2016
Source: Morningstar, Morgan Stanley Wealth Management GIC
Historically, active managers have outperformed more frequently in flat and down markets
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Reflating Economy Benefits Active
Active Manager Performance Can Be Decomposed Into Key Factors
Active Manager
Performance
Benchmark Return
Market Breadth
Fundamental Strategies’ Return
Macroeconomic Indicators
Manager-Specific Characteristics
16.2%
20.3%
12.5%
11.8%
39.0%
Higher Benchmark Return Difficult for Active
Higher Breadth Benefits Active
Investors Valuing Fundamentals Benefits Active
Determinants of Concurrent US Large-Cap Active Manager Outperformance
As of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Haver Analytics. For definitions of factors and universes, please reference our special report, Tactical Equity Allocation: Introducing a Systematic Framework for Short-Term Investment Views, dated December 2015.
--
Current Conditions:
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
50
51
52
53
54
55
56
57
58
Jul'16 Aug'16 Sep'16 Oct'16 Nov'16
0.7%
0.9%
1.1%
1.3%
1.5%
1.7%
Jul'16 Aug'16 Sep'16 Oct'16 Nov'161.4%
1.8%
2.2%
2.6%
Jul'16 Sep'16 Nov'16
Active Managers Thrive When There Is Macroeconomic Regime Shift
Source: Morgan Stanley Wealth Management GIC, Haver Analytics
Improving/ Deteriorating
Growth
Change in Direction of
Inflation
Active managers often invest in companies benefitting from economic conditions that are conducive to establishing pricing power and growing earnings. We have found the following indicators to be related to concurrent active manager outperformance.
Change in Direction of
Rates
ISM Composite (Since 2H2016) As of November 30, 2016
10-Year US Treasury Yields (Since 2H2016) As of December 31, 2016
Consumer Price Index (Since 2H2016) As of November 30, 2016
Correlation to Active Outperformance:
0.22
Change Since 2H2016 55.2 to 56.7
Correlation to Active Outperformance:
0.25
Change Since 2H2016 1.45 to 2.44
Correlation to Active Outperformance:
0.22
Change Since 2H2016 0.8% to 1.7%
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Active Managers Have Succeeded When Market Breadth Was Strong
0%
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30%
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50%
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70%
80%
35%
40%
45%
50%
55%
60% % Stocks Outperforming the Market (Left)
% Large Growth Managers Outperforming Benchmark (Right, Lagged 6M)
Market Breadth and Manager Outperformance Smoothed 6 Months Return vs. Smoothed % Managers Outperforming (Lagged 6 Months); As of December 31, 20161
Source: Morgan Stanley Wealth Management GIC, FactSet. Note: 1) Smoothed by using moving average of previous six months’ data
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Unprecedented Sensitivity to Macro Factors Impaired Stock Pickers, But Continued Decline May Ease Headwinds Long-Term Equity Market Macro Sensitivity1
Trailing Five-Year Average of Equity Macro Sensitivity; As of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Bloomberg, Factset Note 1) Macro Sensitivity is measured as a percentage of movements in the S&P 500 that can be explained by movements in the US dollar, Oil, Gold and the 2-Year Treasury yield.
0
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'92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16
Mac
ro S
ensi
tivi
ty: P
erce
ntag
e of
Equ
ity
Mov
emen
t Ex
plai
ned
by M
acro
Fac
tors
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
- 2%
2%
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Dec
'09
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Mod
eled
Nex
t 12M
Ret
urn
Per
cent
age
of M
anag
ers
Out
perf
orm
ing
Large Core: Percentage of Managers Outperforming (Left)Overall Factor: Modeled Next 12M Return (Right)
Correlation: 47%
Active Managers Have Succeeded When Fundamental Strategies (i.e., Quant Factors) Are Working
0.09
0.11
0.13
0.15
0.17
0.19
0.21
0.23
0.25
Jun
'95
Aug
'96
Oct
'97
Dec
'98
Feb
'00
Apr
'01
Jun
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Aug
'03
Oct
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Dec
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R S
quar
ed: S
tock
Ret
urn
Expa
ined
by
Fact
ors
Relative US Stock Performance Determined by Factor Strategy Performance As of December 31, 2016
Active Manager Outperformance vs. Modeled NTM Return of Factor Strategies December 2009 – December 2016
Source: Morgan Stanley Wealth Management GIC, Morningstar, FactSet. For definitions of factors and universes, please reference our special report, Tactical Equity Allocation: Introducing a Systematic Framework for Short-Term Investment Views, December 2015.
The performance of individual stocks has been increasingly determined by the performance of factor strategies.
Accordingly, active managers have typically outperformed when factor strategies have appeared more attractive – as they do currently.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
0
20
40
60
80
Per
cent
age
of M
anag
ers
Out
perf
orm
Large Growth: Anticipated Percentage of Outperforming Managers
Large Growth: Actual Percentage of Outperforming Managers
%
Our Factor-Based Framework Guides Active/Passive Decisions, and Has Indicated Prior Periods of Active-Manager Weakness
Factors Rationale
Value DispersionGreater difference in prices versus next year's earnings between companies allows active to exploit mispriced opportunities
Earnings Estimate DispersionControversy among analysts allows for active to benefit from research-driven "surprise"
Modeled Return BreadthModeled strong breadth in the next year implies more stocks outperforming; active may benefit
Trailing Return BreadthStrong breadth over the last year has historically meant narrow market in the following year; fewer opportunities for stock-picking
Trailing Global vs. US ReturnGlobal stocks gaining momentum may benefit active managers holding companies outside the US
S&P Macro Sensitivity TrendLower macro sensitivity in the equity market signals more fundamental-driven environment
Flattening yield slope signals elevated chance of market correction; active may benefit during market downturnStock selection is more effective when companies trade distinctly
Yield Slope Level & Trend
Return Correlation Level & Trend
Factors Indicative of a Favorable Environment for Active Managers
Source: Morgan Stanley Wealth Management GIC, Morningstar
Large Growth Modeled vs. Actual Manager Outperformance for Select Styles January 1996 to November 2015, Next 12 Months
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Dynamically Allocating Between Active and Passive Using Our Model Has Outperformed Static Strategies
Source: Morgan Stanley Wealth Management GIC, Morningstar
0
100
200
300
400
500
600
700
800
900
1000
Gro
wth
of $
100
Inve
sted
A/P Tactical + Manager Selection 150bps
A/P Tactical
All Passive
50/50 Active/Passive
All Active
$898
$756
$789
$704
$656
Tactical Model vs. Static Allocations Cumulative Returns1 January 1996 – December 2016, Next 12 Months With Equal Allocation Among Nine Styles
Tactical Model vs. Static Allocations Annualized Excess Returns1 January 1996 – December 2016, Next 12 Months
Large Core
MidCore
Small Core
Equal Allocation Among 9
Styles
A/P Tactical - Strategic 0.3% 0.3% 0.4% 0.4%
A/P Tactical - Passive -0.3% -0.2% 1.0% 0.2%
A/P Tactical - 50/50 0.4% 0.4% 0.6% 0.5%
A/P Tactical - Active 1.1% 1.1% 0.2% 0.8%
A/P Tactical - Passive 0.2% 0.2% 2.1% 0.9%
A/P Tactical - 50/50 0.9% 0.9% 1.6% 1.2%
A/P Tactical - Active 1.6% 1.6% 1.2% 1.5%
No
Man
ager
Se
lect
ion
With
150
bps
Man
ager
Se
lect
ion
A/P Tactical Excess Returns vs. Static Strategies
Page 25
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Our Current Advice on Active/Passive Model Still Tilts Passive …
Active (%) Passive (%)
Large Core 45% 55%
Large Growth 50% 50%
Large Value 35% 65%
Mid Core 40% 60%
Mid Growth 50% 50%
Mid Value 45% 55%
Small Core 70% 30%
Small Growth 70% 30%Small Value 70% 30%
Strategic (7 Yr Horizon)
Active vs. Passive Tactical Model Allocations As of December 31, 2016
Active vs. Passive Strategic Model Allocations As of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Morningstar
Active (%) Passive (%)Change in
Active +/- (%)Active (%) Passive (%)
Large Core 15% 85% 0% 15% 85%
Large Growth 20% 80% 0% 20% 80%
Large Value 5% 95% 0% 5% 95%
Mid Core 10% 90% 0% 10% 90%
Mid Growth 20% 80% 0% 20% 80%
Mid Value 15% 85% 0% 15% 85%
Small Core 40% 60% 0% 40% 60%
Small Growth 40% 60% 30% 70% 30%Small Value 40% 60% 0% 40% 60%
NovemberTactical Allocation
DecemberTactical Allocation
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
… But The Signals May Be Starting to Move Toward Active
Current Active/Passive Factor Weights and Signals
As of December 31, 2016
Source: Morgan Stanley Wealth Management GIC, Morningstar
FactorsLarge Core
Mid Core
Small Core
Current Signal Comment on Current Signal
Modeled Return Breadth 7% 6% 11% Moderate Active Modeled return of equal-weighted index is attractive versus cap-weighted
S&P Macro Sensitivity Trend 14% 22% 12% Moderate Passive Declining sensitivity to macro factors shifts focus to company fundamentals
Trailing Global vs. US Return 11% 4% 12% Moderate Active Improving international outlook bodes well for active managers
Earnings Estimate Dispersion 5% 2% 10% Moderate PassiveGrowing sell-side consensus points to imrpoved management of earnings expectations; accelerating growth may help guide differentiation
Return Correlation 7% 13% 19% Strong Active
Return Correlation Trend 16% 8% 8% Strong Active
Yield Slope 2% 11% 3% Moderate Passive
Yield Slope Trend 8% 3% 1% Moderate Passive
Trailing Return Breadth 11% 6% 9% Strong Passive
Value Dispersion 20% 25% 15% Strong Passive
As high correlation periods (which includes the macro stress of first quarter 2016) roll off, active may benefit, especially if correlations remain near post-election lows
Curve flattening, which frequently occurs at the end of expansions, appears likely in coming years consistent with our late-cycle economic view
Recent small-cap outperformance and expanding multiples of deep value companies are consistent with strengthening macro conditions. Historically these signals have mean-reverted, but may persist given the apparent shift to a reflationary economic regime
Page 27
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
0.1
0.2
0.3
0.4
0.5
Jan '16 Apr '16 Jul '16 Oct '1612 Month Correlation 3 Month Correlation
-2.4
-2.2
-2.0
-1.8
-1.6
-1.4
-1.2
Jan '16 Apr '16 Jul '16 Oct '16Trailing Global vs. US Return
-1.2
-0.8
-0.4
0.0
Jan '16 Apr '16 Jul '16 Oct '16
Forward 12 Month Return Breadth
Some Factors Suggest Being Active Now, and Others Suggest The Outlook for Active Is Improving
Source: Morgan Stanley Wealth Management GIC, Morningstar
Modeled Return Breadth
As of December 31, 2016
Better for Active
0.2
0.3
0.4
Jan '16 Apr '16 Jul '16 Oct '16Trailing 12 Month S&P Macro Sensitivity
Better for Active
Return Correlation
As of December 31, 2016
Global vs. US Return
As of December 31, 2016
Better for Active
S&P Macro Sensitivity As of December 31, 2016
Better for Active
Page 28
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Growing Awareness of Factor Strategies Has Driven Growth of “Smart Beta” Products
596 665
780
987
1,157 1,219 1,245
4.1%
4.5% 4.6%4.9%
5.3%5.5% 5.6%
1%
2%
3%
4%
5%
6%
0
300
600
900
1,200
1,500
2010 2011 2012 2013 2014 2015 1Q16
Smart Beta ETFs Quant MFs Quant HFs % of Total Industry AuM (Right)
Total Smart Beta/Quant/Factor Based AuM ($ billions) As of September 30, 2016
Source: Morgan Stanley & Co., Morgan Stanley Wealth Management GIC, Morningstar
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Low
Vol
(Eq
Wgt
)
Low
60M
Bet
a
Low
252
d B
eta
(Eq
Wgt
)
Low
Vol
(Inv
erse
Var
)
Hig
h Y
ield
Qui
ntile
Top
Qui
ntile
E/P
Low
Vol
(Inv
erse
Vol
)
Div
iden
d W
gt
Trai
ling
Earn
ings
Wgt
Low
252
d B
eta
Top
Qui
ntile
FCF
Yie
ld
Top
Qui
ntile
Fw
d E/
P
Fwd
Earn
ings
Wgt
Bot
tom
Qui
ntile
of S
kew
Equa
lly-W
eigh
ted
Mar
ket
Cap-
Wei
ghte
d M
arke
t
Free
Cas
h Fl
ow W
gt
Boo
k/P
rice
Top
Qui
ntile
Boo
k V
alue
Wgt
Top
Qui
ntile
of S
kew
Hig
h 25
2d B
eta
Hig
h A
ctiv
e R
isk
Trad
ing
Vol
ume
Wgt
Hig
h 60
M B
eta
Hig
h 25
2d B
eta
(Eq
Wgt
)
Despite Lower Fees, “Smart Beta” Targets Only Modest Outperformance and Implementation Remains Unproven
Long-Run Information Ratio of Smart Beta Indexes1 June 1, 1979 – April 12, 2016
Targeted risk-adjusted relative performance, even assuming perfect implementation, is modest
Source: Morgan Stanley & Co. Research, Morgan Stanley Wealth Management GIC Note 1) “Factor Investing Revolution; What Will Drive the Next Wave of Growth?” , published on April 12, 2016 by Morgan Stanley & Co.
Page 30
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Idiosyncratic Alphas for Individual US Mutual Funds, Highest to Lowest August 1, 2006 –July 30, 2016
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Idio
sync
rati
c A
lpha
Individual Investment Funds
36% Positive
64% Negative
Source: Morningstar, FactSet, Morgan Stanley Wealth Management GIC. The analysis on this slide is based on Inigo Fraser-Jenkins, “Fund Management Strategy: What is worth paying for in an asset manager?” Bernstein Research, August 15, 2016. Note: 1) Returns of the active managers are net of investment manager fees.
We find 36% of actively managed US mutual funds are able to add value not accounted for by market appreciation and “smart beta” factors
We Find 35 to 40% of Managers Add Idiosyncratic Alpha, and Thus Can Provide Benefits to Diversified Portfolios
Page 31
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
1Y 3Y 5Y 7Y 10Y Incept. 2016 2015 2014 2013 2012 2011 2010 2009 2008 200715.3% 9.7% 15.3% 14.5% 7.3% 7.4% 15.3% 0.2% 14.4% 34.0% 15.1% 9.6% 15.6% 17.8% (32.5%) (1.7%)10.0% 5.9% 11.6% 9.7% 3.2% 6.3% 10.0% (3.5%) 12.0% 27.2% 14.3% (1.1%) 12.1% 13.4% (36.9%) (0.1%)5.3% 3.8% 3.7% 4.8% 4.1% 1.2% 5.3% 3.7% 2.5% 6.8% 0.8% 10.7% 3.5% 4.4% 4.4% (1.6%)
Year-by-YearAnnualized PeriodsComparison
Stock Selection
Manager Return
Factor Return
(60%)
(40%)
(20%)
0%
20%
40%
60%
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Manager Return Factor ReturnRolling Annual Total Returns [R² = 0.90]
(1.0)
0.0
1.0
2.0
3.0
1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Exposures for Top 10 Factors Quality Q02Value Q01Momentum Q02Momentum Q03Momentum Q01Quality Q04Beta Q01Beta Q02Value Q03R1000V (TR)
Using Our Tools, Disciplined Manager Selection Can Identify Managers Adding Value Not Captured by Quantitative Factors
Active Large-Cap Value Sample Manager's Equity Factor-Driven Replication October, 1997 – December, 2016
Source: Morgan Stanley Custom Solutions, Morgan Stanley Wealth Management GIC
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Combining Our Active/Passive Model With Manager Selection Has Added Value
Active vs. Passive Excess Returns During Active Favorable Periods1
January 1997 to November 2016
Source: Morgan Stanley Wealth Management GIC, Morningstar. Note: 1) Returns of the active managers are net of investment manager fees.
Active Investments -- 0.75% 1.50% Frequency
Large Average 0.20% 0.95% 1.70% 30%
Mid Average 0.47% 1.22% 1.97% 28%
Small Average 2.58% 3.33% 4.08% 30%
Average 1.08% 1.83% 2.58% 29%
Plus Manager Selection Premiums
Passive Investments -- 0.75% 1.50% Frequency
Large Average 2.37% 1.62% 0.87% 30%
Mid Average 2.43% 1.68% 0.93% 34%
Small Average 0.09% -0.66% -1.41% 33%
Average 1.63% 0.88% 0.13% 33%
Minus Manager Selection Premiums
Active vs. Passive Excess Returns During Passive Favorable Periods1
January 1997 to November 2016
Active managers have outperformed when our framework finds them attractive …
… passive strategies have also outperformed when favored by our model.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Glossary and Risk Considerations ALPHA The excess return of an investment relative to the return of a benchmark index.
BETA A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
CORRELATION This is statistical measure of how two securities move in relation to each other. This measure is often converted into what is known as correlation coefficient, which ranges between -1 and +1. Perfect positive correlation (a correlation coefficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random. A correlation greater than 0.8 is generally described as strong, whereas a correlation less than 0.5 is generally described as weak.
Risk Considerations Zachary Apoian, Joseph Pickhardt, Lucy Yan and Aili Chen are not members of the Global Investment Committee and any implementation strategies suggested have not been reviewed or approved by the Global Investment Committee.
For index, indicator and survey definitions referenced in this report please visit the following: http://www.morganstanleyfa.com/public/projectfiles/id.pdf
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Also, municipal bonds acquired in the secondary market at a discount may be subject to the market discount tax provisions, and therefore could give rise to taxable income. Typically, state tax-exemption applies if securities are issued within one’s state of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability.
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates. Generally, if interest rates rise, bond prices fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as compared to the price of a short-term bond. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
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Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
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Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. These risks are magnified in frontier markets. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies. Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected. Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations. Investing in smaller companies involves greater risks than those associated with investing in more established companies, including significant stock price fluctuations and illiquidity. Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economics. ETFs investing in physical commodities and commodity or currency futures have special tax considerations. Physical commodities may be treated as collectibles subject to a maximum 28% long-term capital gains rates, while futures are marked-to-market and may be subject to a blended 60% long- and 40% short-term capital gains tax rate. Rolling futures positions may create taxable events. For specifics and a greater explanation of possible risks with ETFs¸ along with the ETF’s investment objectives, charges and expenses, please consult a copy of the ETF’s prospectus. Investing in sectors may be more volatile than diversifying across many industries. The investment return and principal value of ETF investments will fluctuate, so an investor’s ETF shares (Creation Units), if or when sold, may be worth more or less than the original cost. ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually redeemable from an ETF. Investors should carefully consider the investment objectives and risks as well as charges and expenses of an exchange-traded fund or mutual fund before investing. The prospectus contains this and other important information about the mutual fund. To obtain a prospectus, contact your Financial Advisor or visit the mutual fund company’s website. Please read the prospectus carefully before investing. REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. Nondiversification: For a portfolio that holds a concentrated or limited number of securities, a decline in the value of these investments would cause the portfolio’s overall value to decline to a greater degree than a less concentrated portfolio. Portfolios that invest a large percentage of assets in only one industry sector (or in only a few sectors) are more vulnerable to price fluctuation than those that diversify among a broad range of sectors. Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy. Investors should consult with their tax advisor before implementing such a strategy. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management retains the right to change representative indices at any time.
Disclosures Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor.
Risk Considerations and Disclosures
Page 35
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
Page 35
The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors, including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors. Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this material.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley Wealth Management has no obligation to provide updated information on the securities/instruments mentioned herein.
Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material.
Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.
This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813).
Morgan Stanley Wealth Management is not incorporated under the People's Republic of China ("PRC") law and the material in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC's relevant governmental authorities.
If your financial adviser is based in Australia, Switzerland or the United Kingdom, then please be aware that this report is being distributed by the Morgan Stanley entity where your financial adviser is located, as follows: Australia: Morgan Stanley Wealth Management Australia Pty Ltd (ABN 19 009 145 555, AFSL No. 240813); Switzerland: Morgan Stanley (Switzerland) AG regulated by the Swiss Financial Market Supervisory Authority; or United Kingdom: Morgan Stanley Private Wealth Management Ltd, authorized and regulated by the Financial Conduct Authority, approves for the purposes of section 21 of the Financial Services and Markets Act 2000 this material for distribution in the United Kingdom.
Morgan Stanley Wealth Management is not acting as a municipal advisor to any municipal entity or obligated person within the meaning of Section 15B of the Securities Exchange Act (the “Municipal Advisor Rule”) and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of the Municipal Advisor Rule.
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Disclosures (cont’d)