These securities are not deposits or savings accounts and are not insured by the Federal Deposit Insurance
Corporation or any other governmental agency or instrumentality, nor are they obligations of, or guaranteed by, a bank.
INDEX RISK FACTORS
The SmartInvest
Index is the base index for the SmartInvest Alpha Index and the SmartInvest Alpha Volatility Target Index. Therefore, the following
index risk factors applicable to the SmartInvest Index are also applicable to the SmartInvest Alpha Index and the SmartInvest
Alpha Volatility Target Index. Please
also
see “Additional Risk Factors applicable to the SmartInvest Alpha Index
and the SmartInvest Alpha Volatility Target Index” for additional risks related to an investment in securities linked to
the SmartInvest Alpha Index and/or the SmartInvest Alpha Volatility Target Index, and see “Additional Risk Factors applicable
to the SmartInvest Alpha Volatility Target Index” for additional
risks related to an investment in securities linked
to the SmartInvest Alpha Volatility Target Index.
Proprietary
and Rules-Based Indices:
The Indices are quantitative and rules-based and may not yield future positive performance. They
follow rules-based proprietary strategies that operate on the basis of pre-determined rules. There can be no assurances that the
methodology of an Index will yield positive performance in all economic conditions, and past performance of such Index (actual
or simulated), is not an indication of future performance. Accordingly, potential investors in products which are linked to the
performance of an Index should determine whether those rules are appropriate in light of their individual circumstances and investment
objectives and ensure that they understand the mechanics of such Index. Potential investors should consult with their legal, business
and tax advisers to determine the consequences of investing in a product linked to such Index.
No Shareholder
Rights:
The SmartInvest Index takes a long position in certain selected stocks that are components of the S&P 500
®
Index (the “Underlying Assets”). However, investors will not have any claim against any of the Underlying Assets
that comprise the SmartInvest Index.
Index Performance
Consideration:
There is no guarantee that an Index will have positive performance or will outperform benchmark indices. In
addition, any investment linked to an Index may not necessarily be the same as an investment in the constituents of that Index.
Past performance (actual or simulated) is not indicative of future performance. There are only 40 stocks in the SmartInvest Index
at any one time and any sector diversification does not eliminate the exposure to the downside risk of each individual asset.
Prospective investors should be aware that performance of an Index is not only related to the composition of assets, but also
related to the application of the strategy and rules that determine the selection of certain underlying securities from time to
time. The parameters deployed by the rules influence performance of an Index. Prospective investors should note that certain specifications
of an Index including, but not limited to, underlying security selection criteria and rebalancing window are pre-determined parameters.
As the “Pre-filter
Universe” used in the SmartInvest Index is determined by reference to the stocks in the “Eligible Universe”
held by the least number of hedge funds (this number includes
every
Form 13F filer, whether or not a hedge fund, that has
entirely sold down its position in the preceding quarter), the SmartInvest Index aims to invest in stocks that are among the more
concentrated reported positions held by hedge funds and does not aim to track stocks held by large numbers of hedge funds.
In addition,
the SmartInvest Index invests in only 40 stocks at any one time. As a result of investing in a smaller number of stocks compared
to benchmark indices such as the S&P 500
®
Index, the SmartInvest Index has historically often been more volatile
than benchmark indices. It has also tended to have larger maximum yearly drawdowns than the S&P 500
®
Index.
Moreover, as
the SmartInvest Index invests in fewer companies than are tracked by the S&P 500
®
Index, the SmartInvest Index
is exposed to more concentrated market risks of a smaller number of underlying companies as compared to the S&P 500
®
Index.
Basis Risk:
When considering any investment, the return of which is linked to the performance of an Index, prospective investors should
be aware that the level of an Index can go down as well as up and that the performance of such Index and its underlying securities
in any future period may not mirror its past performance when assessing the simulated historical performance of such Index. The
performance of the SmartInvest Index is not expected to reflect the performance of each of the underlying securities and is not
expected to reflect the overall performance of the S&P 500
®
Index. The level of the SmartInvest Index could
be lower than a weighted investment in each of the underlying securities.
Underlying
Security Selection Criteria:
The selection of the underlying securities of the SmartInvest Index follows a pre-determined
set of criteria, including their ownership by hedge fund managers and their liquidity. A Morgan Stanley entity that acts as the
hedging entity for a structured product that is linked to the performance of the SmartInvest Index will enter into hedging transactions
in order to provide the return of the SmartInvest Index. When such hedging transactions are or will be disrupted or affected by
any regulatory changes, the index sponsor of the SmartInvest Index would need to adjust the selection criteria accordingly.
Use of Information
Disclosed on Forms 13F:
The SmartInvest Index seeks to invest in stocks based on the publicly available filings on Form 13F
by hedge fund managers. Filers of Form 13F are not required to disclose all of their holdings of securities on such form. For
example, filers need only disclose certain securities, sometimes referred to as “Section 13(f) securities,” a list
of which is published by the SEC. In addition, filers do not disclose any short positions on Form 13F, nor are such positions
subtracted from long positions in the same security. As a result, the holdings of securities disclosed on any hedge fund manager’s
Form 13F will likely not reflect the actual holdings of securities by that hedge fund manager. Consequently, the strategy does
not take into account all of the positions that might be held by hedge fund managers. In addition, filers do not disclose the
rationale for any investment, and so reported investments could be part of a broader strategy and may not reflect a judgment on
the intrinsic value of investing in the reported security.
Forms 13F are
required to be filed within 45 days of the end of each calendar quarter. As a result, the SmartInvest Index uses information reported
quarterly on a 45-day trailing basis and may acquire or track a stock that hedge fund managers are no longer holding.
Only institutional
investment managers that exercise investment discretion over $100 million or more in Section 13(f) securities must file Form 13F.
The SmartInvest Index will not take into account any stock selections of any investment manager that does not satisfy this criteria
and is therefore not required to file Form 13F.
In constituting
the “Pre-filter Universe,” the SmartInvest Index takes into account positions entirely sold down by any Form 13F filer,
whether or not a hedge fund. As a result, positions of Form 13F filers that are not hedge funds may affect the stocks in which
the SmartInvest Index invests.
Changes to
Form 13F Requirements:
It is possible that the requirements related to the filing of Forms 13F (such as the required content
or timing for filing) may change in the future, or the requirement to make such filings could be abolished completely. In this
case, the SmartInvest Index Sponsor will cease publication of the SmartInvest Index.
Index Publication:
The index sponsor of the relevant Index will use reasonable efforts to publish the level of such relevant Index in respect
of each index business day as soon as reasonably practicable thereafter. A published level of an Index will not be altered or
amended unless it is necessary to correct a manifest error. The index sponsor of the relevant Index accepts no liability to
any person for
any publication, suspension of publication or non-publication of the level of such relevant Index for any period of time or in
any place.
Market Factors
and Equity Volatility
: The underlying securities are publicly-traded on the relevant exchanges and markets. Prospective investors
should be experienced with respect to transactions in investments with a value derived from the underlying securities. The prices,
volatility and liquidity of the underlying securities may vary over time and may increase or decrease by reference to a variety
of factors which may include (but not be limited to) political policies, change in law, corporate actions, macroeconomic factors
and speculation. This market risk may cause high volatility of the underlying securities and may have a negative effect on the
level of the relevant Index.
Index Sponsor’s
Powers:
The application of the methodology described herein by the index sponsor of the relevant Index shall be conclusive
and binding. However, the index sponsor of the relevant Index may supplement, amend (in whole or in part), revise or withdraw
these rules at any time if it has a valid reason for doing so. Such a supplement, amendment, revision or withdrawal may lead to
a change in the way the relevant Index is calculated or constructed and may affect such Index in other ways, including future
performance. Without prejudice to the generality of the foregoing, the index sponsor of the relevant Index may determine that
a change to the rules is required or desirable in order to optimize the index methodology of the relevant Index in accordance
with the objectives of such relevant Index, or to address an error, ambiguity or omission, to take into account any prevailing
regulatory or judicial requirements or developments, to reflect any new industry guidance or to proportionately reflect other
legitimate cost increases or reductions associated with providing such relevant Index. The rules of an Index may change without
prior notice. All of the above may affect the value of an Index and the value of any financial products linked to such Index.
The index sponsor
of the relevant Index shall have the right, in its sole discretion, to cease compiling, calculating and publishing values of such
relevant Index if, at any time, such relevant index sponsor determines that the relevant Index no longer meets or will not be
capable of meeting the criteria established by such relevant index sponsor or otherwise determines that the relevant Index shall
no longer be calculated. The index sponsor and index calculation agent for an Index have no obligation to take into account the
considerations of any other person when making any such adjustments and have no obligation to inform any person of such modification
or change.
The index calculation
agent of the relevant Index is responsible for compiling and calculating such relevant Index pursuant to the rules of such relevant
Index. The index sponsor for the relevant Index retains the discretion to appoint an alternative index calculation agent for such
relevant Index. The index sponsor for the relevant Index retains the final discretion as to the manner in which such relevant
Index is calculated and constructed. Furthermore, the index sponsor of the relevant Index has the final authority on the interpretation
and application of the rules of such relevant Index.
Calculations
and Determinations by the Index Calculation Agent for the Relevant Index:
The index calculation agent’s calculations
and determinations in relation to the relevant Index shall be binding on all parties in the absence of manifest error. No party
(whether the holder of any financial product linked to the relevant Index or otherwise) will be entitled to proceed (and agrees
to waive proceedings) against the index calculation agent for the relevant Index in connection with any such calculations or determinations
or any failure to make any calculations or determinations in relation to the relevant Index. For so long as the index calculation
agent for the relevant Index calculates such relevant Index, calculations and determinations by such index calculation agent in
connection with such relevant Index will be made in reliance upon the information of various sources. The index calculation agent
for the relevant Index does not accept any liability for loss or damage of any kind arising from the use of such information in
any such calculation or determination.
Conflicts
of Interest:
Our affiliate is acting as the index sponsor for the SmartInvest Index, the SmartInvest Alpha Index and the SmartInvest
Alpha Volatility Target Index. Morgan Stanley, MSFL and their affiliates may from time to time engage in transactions involving
the underlying securities for their proprietary accounts and/or for accounts of their clients, may act as market maker in such
securities and/or be providing underwriting, banking, advisory or other services to the issuers of such securities. Such activities
may not be for the benefit of the holders of investments related to an Index and may have a negative effect on the value of the
underlying securities and consequently on the value of such Index. In addition, Morgan Stanley, MSFL and their affiliates may
from time to time act in other capacities, such as the issuer of investments or the advisor thereof. Morgan Stanley, MSFL and
their affiliates may also issue or enter into derivative instruments in respect of such investments and/or the underlying securities,
including with certain providers of exchanged traded products, and the use of such derivatives may consequently affect the value
of the underlying securities of an Index.
Morgan Stanley,
MSFL or one or more of their affiliates may carry out hedging activities related to an Index (and possibly to other instruments
linked to such Index, or to any of the underlying securities), including trading in the underlying securities as well as in other
instruments related to such Index. Some of our affiliates also trade the underlying securities and other financial instruments
related to such Index on a regular basis as part of their general broker-dealer and other businesses. Any of these hedging or
trading activities could adversely affect the value of such Index.
Such activities
may present conflicts of interest which may affect the level of the relevant Index. In acting in any of these capacities, Morgan
Stanley, MSFL or their affiliates are not obliged to take into account the interests of any person including (but not limited
to) investors in products linked to such Index.
Index Performance
Data – Retrospective Index Calculation:
The SmartInvest Index has been retrospectively calculated by the SmartInvest
Index Calculation Agent on a hypothetical basis for the period from March 5, 2002 to March 5, 2007, using the same methodology
for the SmartInvest Index as described herein. The retrospective calculation of the SmartInvest Index is purely hypothetical and
may not be an accurate or meaningful comparison. The actual performance of the SmartInvest Index may vary significantly from the
results obtained from back-testing. 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. We make no representation as to the suitability of data used as a basis for the retrospective calculation
of the SmartInvest Index. All prospective investors should be aware that a retrospective calculation means that no actual investment
which allowed a tracking of the performance of the SmartInvest Index existed at any time during the period of the retrospective
calculation and that as a result the comparison is purely hypothetical. The methodology and the strategy used for the calculation
and retrospective calculation of the SmartInvest Index have been developed with the advantage of hindsight. In reality, it is
not possible to invest with the advantage of hindsight and therefore this performance comparison is purely theoretical. In addition,
results obtained from back-testing include hypothetical results that do not reflect the reinvestment of dividends and other earnings
or the deduction of any expenses that an investor in any product, the return of which is linked to the performance of the SmartInvest
Index, would have paid or actually paid and do not account for all financial risk that may affect the actual performance of any
such investment.
Index Market
Disruption Event:
An Index is subject to certain adjustment and disruption events, including but not limited to trading disruption
of the underlying securities, index disruption of the S&P 500
®
Index and certain corporate actions of the issuers
of the underlying securities and any other situations in which it is difficult or even impossible for the index sponsor and/or
the index
calculation agent
for relevant Index to rebalance, calculate and/or publish such relevant Index or for a financial product issuer to carry out hedging
arrangements in relation to any financial product linked to such relevant Index. As a consequence, the index sponsor for the relevant
Index may exercise an amount of discretion in relation to such relevant Index (including the right to cancel such relevant Index,
change the published methodology or make adjustments to the composition of such relevant Index) and the exercise of such discretion
may have an adverse impact on the level of such relevant Index and any financial products linked to such relevant Index.
No Active
Management:
An Index is quantitative and is not actively managed by Morgan Stanley, MSFL or their affiliates (the “Morgan
Stanley Group”) or any third party. The Morgan Stanley Group is not acting as a fiduciary for, or an advisor to, any investor
in respect of an Index.
Not a Hedge
Fund and Not the Same as Investing in a Hedge Fund or a Group of Hedge Funds:
Hedge fund investors and corporate buyers are
numerous and they use extremely varied approaches to investing. The SmartInvest Index does not track hedge funds and does not
constitute a hedge fund replication strategy. The SmartInvest Screens rank and identify securities in the S&P 500
®
Index that are, or have been, held by hedge funds in concentrated reported positions for inclusion in the SmartInvest Index.
However, the SmartInvest Screens do not attempt to, and cannot in any way, replicate investing in any hedge fund or group of hedge
funds. As a consequence, investing in the SmartInvest Index and the returns you might obtain, are not at all equivalent to an
investment in a hedge fund or similar fund. We may advise hedge funds on strategies and metrics that are not used to determine
the SmartInvest Index. Even if we determine that hedge funds using other strategies or metrics are successful, we will have no
obligation to revise the SmartInvest Index methodology.
Lack of Diversification:
The SmartInvest Index is derived from a predetermined subset of stocks and may be focused exclusively on one geographic region
or may be more concentrated in specific industry sectors or categories. The SmartInvest Index typically includes fewer stocks
than benchmark equity indices and has no geographical or sector concentration limits. As a result, the SmartInvest Index is likely
to be less diversified than comparable benchmark indices.
Fixed Strategy:
An Index use a pre-defined, objective stock selection process that differs from an actively managed strategy in that the component
stocks will change only if required by the selection criteria and only at each quarterly rebalancing. The index methodology of
an Index is fixed and will not change over time even if such Index underperforms the benchmark indices. Accordingly, an Index
is not actively managed to adjust to changing business, financial, geopolitical or other conditions, as would the investment process
of a private equity investor or corporate buyer.
Additional
Risk Factors applicable to the SmartInvest Alpha Index and the SmartInvest Alpha Volatility Target Index
The SmartInvest
Index is the base index for the SmartInvest Alpha Index and the SmartInvest Alpha Volatility Target Index. Therefore, an investment
linked to the SmartInvest Alpha Index or the SmartInvest Alpha Volatility Target Index is subject the preceding risk factors applicable
to the SmartInvest Index as well as the following additional risk factors.
Strategy Risk:
The SmartInvest Alpha Index seeks to benefit from the relative performance of the SmartInvest Total Return Index against the
performance of the S&P 500
®
Total Return Index. However, there is no guarantee that this strategy will be successful.
The S&P 500
®
Total Return Index may outperform the SmartInvest Total Return Index, in which case the return
on the SmartInvest Alpha Index will be negative.
Outperformance
Risk:
The performance of the SmartInvest Alpha Index will be negatively affected by any negative performance of the SmartInvest
Total Return Index
and
by any positive performance of the S&P 500
®
Total Return Index. In periods of
both rising and falling equity markets, it is possible that the S&P 500
®
Total Return Index may outperform
the SmartInvest Total Return Index, in which case the return on the SmartInvest Alpha Index will be negative. For example, even
if both the SmartInvest Total Return Index and the S&P 500
®
Total Return Index increase in value, the SmartInvest
Alpha Index will decrease in value if the increase in the value of the S&P 500
®
Total Return Index is greater
than the increase in the value of the SmartInvest Total Return Index. Furthermore, even if both the SmartInvest Total Return Index
and the S&P 500
®
Total Return Index decrease in value, the SmartInvest Alpha Index will decrease in value if
the decrease in the value of the SmartInvest Total Return Index is greater than the decrease in the value of the S&P 500
®
Total Return Index.
Risk of Unequal
Long/Short Exposure
: The SmartInvest Alpha Index strategy seeks to combine long exposure to the SmartInvest Total Return Index
with equivalent short exposure to the S&P 500
®
Total Return Index. However, the SmartInvest Alpha Index’s
positions in the respective indices are rebalanced only once per month, and the respective weightings of the long and short positions
will diverge between rebalancings, based on the performances of the respective indices. Any such divergence in the weightings
will cause the SmartInvest Alpha Index to deviate from a fully balanced outperformance strategy and could have a negative effect
on the performance of the SmartInvest Alpha Index.
Limited Performance
History:
The SmartInvest Alpha Index was created on April 28, 2011 and therefore has a limited history. An investment in the
SmartInvest Alpha Index may therefore involve greater risk than an investment in an index with longer actual historical performance
and a proven track record. See “Risk Factors—Index Performance Data—Retrospective Index Calculation” above.
Additional
Risk Factors applicable to the SmartInvest Alpha Volatility Target Index
The SmartInvest
Index is the base index for the SmartInvest Alpha Index and the SmartInvest Alpha Volatility Target Index, and the SmartInvest
Alpha Volatility Target Index is a variation on the SmartInvest Alpha Index. Therefore, an investment linked to the SmartInvest
Alpha Volatility Target Index is subject the preceding risk factors applicable to the SmartInvest Index and the SmartInvest Alpha
Index as well as the following additional risk factors.
Strategy Risk:
The SmartInvest Alpha Volatility Target Index seeks to achieve a target volatility of 5% in the SmartInvest Alpha Index by
adjusting its notional exposure to the SmartInvest Alpha Index based on the Realized Volatility. However, there is no guarantee
that the SmartInvest Alpha Volatility Target Index will be successful in achieving its objective, as future volatility can deviate
from past trends.
The SmartInvest
Alpha Volatility Target Index may actually achieve volatility of less than or greater than its target volatility of 5%.
Risk of Over-exposure
or Under-exposure:
The SmartInvest Alpha Volatility Target Index adjusts its exposure to the SmartInvest Alpha Index on each
business day, and such exposure can be less than or greater than 100%. If the SmartInvest Alpha Index decreases in value at a
time when the SmartInvest Alpha Volatility Target Index’s exposure to the SmartInvest Alpha Index is greater than 100%,
the effect of that depreciation will be leveraged in calculating the level of the SmartInvest Alpha Volatility Target Index, resulting
in accelerated losses. Conversely, if the SmartInvest Alpha Index appreciates at a time when the SmartInvest Alpha Volatility
Target Index’s exposure to the SmartInvest Alpha Index is less than 100%, the effect of that appreciation will be reduced
in calculating the level of the SmartInvest Alpha Volatility Target Index, resulting in reduced gains.
Additionally,
the portion of the SmartInvest Alpha Volatility Target Index’s exposure that is allocated to cash will generate no return.
Low Volatility
not Equivalent to Low Risk:
Low volatility in the SmartInvest Alpha Index is not synonymous with low risk in an investment
linked to the SmartInvest Alpha Volatility Target Index. Even if the volatility of the SmartInvest Alpha Index were to be in line
with the Volatility Target, the level of the SmartInvest Alpha Volatility Target Index may nevertheless decrease over time.
Limited Performance
History:
The SmartInvest Alpha Volatility Target Index was created on April 28, 2011 and therefore has a limited history.
An investment in the SmartInvest Alpha Volatility Target Index may therefore involve greater risk than an investment in an index
with longer actual historical performance and a proven track record. See “Risk Factors—Index Performance Data—Retrospective
Index Calculation” above.
Description of Index Methodology
for the Morgan Stanley SmartInvest Equity Index
The SmartInvest
Index is the base index for the SmartInvest Alpha Index and the SmartInvest Alpha Volatility Target Index. Therefore, the following
description of index methodology for the SmartInvest Index is also relevant to the SmartInvest Alpha Index and the SmartInvest
Alpha Volatility Target Index. Please also see “Description of Index Methodology for the SmartInvest Alpha Index”
and “Description of Index Methodology for the SmartInvest Alpha Volatility Target Index.”
The Morgan Stanley
SmartInvest Equity Index (the “SmartInvest Index”) is a quantitative, rules-based, long-only equity index developed
by Morgan Stanley. The SmartInvest Index aims to invest, at any one time, in 40 stocks included in the S&P 500
®
Index that are among the more concentrated reported positions held by hedge funds, based on analyzing their publicly available
stock selections, as disclosed by the hedge funds on their filed Forms 13F. The SmartInvest Index is calculated, published and
rebalanced by Standard & Poor’s Financial Services LLC as index calculation agent. The inception date for the SmartInvest
Index was March 5, 2007. The SmartInvest Index is not a replication of, nor an alternative to, hedge funds. The SmartInvest Index
is not a hedge fund and not linked to any hedge fund or group of hedge funds.
Section 13(f)
of the Securities Exchange Act of 1934 requires certain institutional investment managers to report their holdings of certain
exchange-traded securities to the Securities and Exchange Commission on Form 13F. Form 13F requires disclosure of, among other
things, issuer names; description of the class of security (e.g. common stock, put/call option, class A shares, debt); number
of securities owned; and fair market value of securities managed. Filers do not disclose any short positions or the rationale
for the investment on Form 13F.
Determination
of the “Selection Universe”
In order to qualify
for inclusion in the SmartInvest Index, a security must meet the following selection universe requirements on the quarterly selection
date. The selection dates are the first business day of each March, June, September and December.
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•
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The
security must be a constituent of the S&P 500
®
Index.
|
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•
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Ownership
information for the security must be available through Form 13F filings.
|
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•
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The
issuer of the security must have a market capitalization that exceeds $2 billion times
(the closing level of the S&P 500
®
Index on the prior trading day
divided by its closing level on December 29, 2006). This adjusts $2 billion for then-current
market size as compared to 2006.
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Selection
Procedure
The components
of the SmartInvest Index are selected based on the following steps:
Determination
of the “Eligible Universe”
A third-party
service provider collects all Form 13F filings.
The securities
constituting the selection universe are ranked according to the proportion of shares owned by hedge funds as a percentage of total
shares outstanding. A higher percentage of hedge fund ownership is ranked higher than a lower percentage of hedge fund ownership.
Of the securities
constituting the selection universe, a predetermined number of the highest ranked securities are selected to be part of the eligible
universe. If two or more securities are equally ranked, the tied securities are ranked by market capitalization, with a higher
market capitalization ranked higher than a lower market capitalization.
The SmartInvest
Index uses information reported quarterly on a 45-day trailing basis and may acquire or track a stock that hedge fund managers
are no longer holding.
Determination
of the “Pre-filter Universe”
The securities
constituting the eligible universe are then ranked according to the following two criteria:
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•
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the
number of hedge funds that own the security. Ownership by a smaller number of hedge funds
is ranked higher than ownership by a larger number of hedge funds; and
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•
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the
number of filers of Form 13F that have entirely sold down their position in the security
between such filers’ prior Form 13F filings and the latest available Form 13F filings
for such filers.
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Of the securities
constituting the eligible universe, the 40 highest ranked securities are selected to be part of the pre-filter universe. If two
or more securities are equally ranked, the tied securities are ranked by the proportion of shares owned by all hedge funds to
the total shares outstanding, with a higher proportion of shares owned by hedge funds ranked higher than a lower proportion of
shares owned by hedge funds.
The Liquidity
Filter
A liquidity filter
is then applied to the securities constituting the pre-filter universe. The liquidity filter analyzes the trading volume of each
security to determine if it is sufficiently liquid to be included in the SmartInvest Index.
A security passes
the liquidity filter if its historic average daily turnover is higher than its target average daily turnover. Historic average
daily turnover is calculated on each selection date by comparing the weekly average daily volume of the security and the weekly
average daily closing price of such security for the thirteen weeks preceding the selection date. Securities in the pre-filter
universe that do not pass the liquidity filter are ranked based on a measure of liquidity. The lowest-ranked security is removed
from the pre-filter universe and replaced with the highest-ranked security from the eligible universe not already selected. This
process is repeated until all 40 securities constituting the pre-filter universe pass the liquidity filter.
The securities
that constitute the pre-filter universe and satisfy the liquidity filter are index components. The component weights of the index
components are determined on the basis of their relative free-float market capitalization, subject to a maximum weight of 10%.
Rebalancing
The selection
procedure described above is carried out by the index calculation agent on each selection date to determine changes to the composition
of the SmartInvest Index to be implemented on the next rebalancing date. The rebalancing dates are the third business day of each
March, June,
September and
December, subject to postponement for non-trading days or certain SmartInvest Index Market Disruption Events (as defined below).
The number of
index shares of each index component to be included in the SmartInvest Index is calculated on each quarterly rebalancing date
on the basis of its component weight. The rebalancing will be effective on the next rebalancing effective date. The rebalancing
effective dates are the first scheduled trading day succeeding the rebalancing date.
Quarterly
Periodic Review
Form 13F has
to be filed quarterly, no later than 45 calendar days after the end of March, June, September and December. Each quarterly periodic
review uses Forms 13F filed for the most recent period. For example, positions disclosed in a Form 13F for the period ending December
will be filed around mid-February, and these data will be used to determine the eligible universe for the next March selection
date. No data from filings for an earlier filing period are used in determining the selection universe.
Index
Calculation
There are two
versions of the SmartInvest Index, a Total Return Index (where net dividends are reinvested) and a Price Return Index (where dividends
are not reinvested). The level of both versions of the SmartInvest Index was set at 1,000 on the index base date, March 5, 2002.
The live date for both versions of the SmartInvest Index was March 5, 2007. The SmartInvest Index is calculated on an end-of-day
basis, except in the event of certain SmartInvest Index Market Disruption Events (as defined below), and is based on the component
weights and related index shares and the closing prices of the index components. Both the SmartInvest Total Return Index and the
SmartInvest Price Return Index are expressed in U.S. dollars, with the SmartInvest Total Return Index reinvesting a percentage
of declared dividends, referred to as “net dividends.” This percentage (the “Applicable Percentage”)
will equal (i) 70% or, if less, (ii) 100% less such percentage, if any, as determined by the SmartInvest Index Sponsor from time
to time to take account of any tax, duty, withholding, deduction or other charge whatsoever, including but not limited to taking
into account any tax, duty, withholding, deduction or other charge that is or would be sustained or incurred by us and/or any
of our affiliates as a result of the receipt of the relevant declared dividend if any of them is or were the holder of the relevant
share. As of the date of this index supplement, the Applicable Percentage is equal to 70%.
Adjustments
From time to
time, there may be situations requiring adjustments to the SmartInvest Index outside of a scheduled quarterly periodic review
to ensure that the SmartInvest Index continues to reflect, as closely as possible, the value of the index components.
It is possible
that the requirements related to the filing of Forms 13F (such as the required content or timing for filing) may change in the
future, or the requirement to make such filings could be abolished completely. In this case, the SmartInvest Index Sponsor will
cease publication of the SmartInvest Index.
SmartInvest
Index Market Disruption Events
“SmartInvest
Index Market Disruption Event” means (a) (i) the occurrence or existence, as determined by the index calculation agent in
respect of any index component, of (A) a material suspension of or limitation imposed on trading by the primary exchange on which
such index
component is
listed or traded (the “relevant exchange”), (B) any event that materially disrupts or impairs the ability of market
participants in general to effect transactions in, or obtain market values for such index component on the relevant exchange during
the one hour period preceding the scheduled weekday closing time of such exchange, or (C) the closure of the relevant exchange
prior to its scheduled weekday closing time unless it is announced at least one hour prior to the earlier of (x) the actual closing
time for the regular trading session on such exchange and (y) the submission deadline for orders to be entered into such exchange
system for execution at the scheduled weekday closing time of such exchange and (ii) the aggregate of any and all such disrupted
index components comprises 20% or more of the SmartInvest Index; or
(b) the occurrence
or existence, as determined by the index calculation agent, in respect of futures or options contracts relating to the SmartInvest
Index, of (i) a material suspension or limitation imposed on trading by an exchange or quotation system where trading has a material
effect on the overall market for futures or options contracts relating to the SmartInvest Index (the “related exchange”)
during the one hour period preceding the scheduled weekday closing time of such exchange, (ii) any event that materially disrupts
or impairs the ability of market participants in general to effect transactions in, or obtain market values for such futures or
contracts related to the SmartInvest Index on any related exchange during the one hour period preceding the scheduled weekday
closing time of such exchange, or (iii) the closure of the related exchange prior to its scheduled weekday closing time unless
it is announced at least one hour prior to the earlier of (x) the actual closing time for the regular trading session on such
exchange and (y) the submission deadline for orders to be entered into such exchange system for execution at the scheduled weekday
closing time of such exchange.
For the purposes
of determining whether a SmartInvest Index Market Disruption Event exists in respect of an index component at any time, if a SmartInvest
Index Market Disruption Event occurs in respect of such index component at that time, then the component weight of that index
component to the Index shall be based on a comparison of the portion of the SmartInvest Index attributable to that index component
to the overall SmartInvest Index, in each case using the weighting of the index component as published by the index calculation
agent as part of the market opening data.
In the event
of a SmartInvest Index Market Disruption Event, the closing value of the SmartInvest Index shall not be calculated on such day,
provided that if a SmartInvest Index Market Disruption Event continues for a period of eight scheduled trading days then the closing
value of the SmartInvest Index will be calculated by the index calculation agent based on prevailing market conditions, the last
reported closing price of the relevant index components and other conditions that the index calculation agent determines relevant.
If a SmartInvest
Index Market Disruption Event occurs on a rebalancing date, the index calculation agent shall make determinations and/or adjustments
it considers appropriate to calculate the closing value of the SmartInvest Index by reference to prevailing market conditions
and the last available price of the relevant index components, or may instead select an alternate date for such rebalancing date.
Description of Index Methodology
for the Morgan Stanley SmartInvest Alpha Index
The Morgan Stanley
SmartInvest Alpha Index (the “SmartInvest Alpha Index”) is a quantitative, rules-based, equity index developed by
Morgan Stanley & Co. International plc. The SmartInvest Alpha Index aims to reflect the relative performance of an equity
investment strategy through a long position in the SmartInvest Total Return Index and an equivalent short position in the S&P
500
®
Total Return Index (each, a “SmartInvest Alpha Index Component”). The SmartInvest Alpha Index
is calculated, published and rebalanced by Morgan Stanley Advantage Services Pvt. Ltd. or any Morgan Stanley affiliates designated
as successor thereto, as index calculation agent. The inception date for the SmartInvest Alpha Index was April 28, 2011.
Monthly
Periodic Review and Rebalancing
Each month, the
index calculation agent carries out monthly periodic review and rebalances the SmartInvest Alpha Index to ensure it has equivalent
long and short positions on each rebalancing date. The index calculation agent will use the closing price of each SmartInvest
Alpha Index Component to be included in the SmartInvest Alpha Index on the related rebalancing date. The rebalancing dates are
the third business day of each month, subject to postponement for non-trading days or certain SmartInvest Alpha Index Disruption
Events (as defined below).
The respective
weighting of each SmartInvest Alpha Index Component is calculated on each monthly rebalancing date, and the rebalancing will be
effective on the first business day succeeding the related rebalancing date.
Index
Calculation
The level of
the SmartInvest Alpha Index was set to 1,000 as of the index base date, March 5, 2002. The live date of the SmartInvest Alpha
Index was April 28, 2011. The SmartInvest Alpha Index is calculated on an end-of-day basis, except in the event of certain SmartInvest
Alpha Index Disruption Events (as defined below), and is based on the respective weightings and closing levels of the SmartInvest
Alpha Index Components. As of each rebalancing date, the weighting of the SmartInvest Total Return Index is 100% (representing
1 × long exposure), and the weighting of the S&P 500
®
Total Return Index is -100% (representing 1 ×
short exposure). The SmartInvest Alpha Index is expressed in U.S. dollars.
Adjustments
From time to
time, there may be situations requiring adjustments to the SmartInvest Alpha Index outside of a scheduled monthly periodic review
to ensure that the SmartInvest Alpha Index continues to reflect, as closely as possible, the value of the SmartInvest Alpha Index
Components.
SmartInvest
Alpha Index Disruption Events
“SmartInvest
Alpha Index Disruption Event” means, whether due to a SmartInvest Index Market Disruption Event or otherwise, (a)(i) the
SmartInvest Alpha Index Sponsor or the index calculation agent for the SmartInvest Alpha Index determines that any of the source
data required to calculate the SmartInvest Alpha Index is not available or (ii) there is any permanent calculation or prolonged
suspension of a SmartInvest Alpha Index Component (the “SmartInvest Alpha Index Price Source Disruption”); (b) the
SmartInvest Alpha Index Sponsor determines that there has been a material
change to the
methodology used to calculate a SmartInvest Alpha Index Component or there has been a material change in the constituents of a
SmartInvest Alpha Index Component (the “Material Change in SmartInvest Alpha Index Component Methodology”); (c) the
SmartInvest Alpha Index Sponsor determines there has been a termination, revocation or suspension of any third party license agreement
or permission pursuant to which data is supplied to compile or calculate the SmartInvest Alpha Index or a SmartInvest Alpha Index
Component (the “SmartInvest Alpha Index Termination of Data License”); (d) there has been a change in applicable law
or regulation that prevents the SmartInvest Alpha Index Sponsor and/or the index calculation agent for the SmartInvest Alpha Index
from calculating and/or publishing the SmartInvest Alpha Index (the “SmartInvest Alpha Index Change in Law”); (e)
the SmartInvest Alpha Index Sponsor determines that we and/or any of our affiliates would be unable, after using commercially
reasonable efforts, to (i) acquire, establish, re-establish, substitute, maintain, unwind or dispose of any transactions or instruments
it deems necessary to hedge its position in relation to any securities issue or other relevant transactions relating to or calculated
by reference to the SmartInvest Alpha Index, or (ii) realize, recover or remit the proceeds of any such transactions or instruments
(the “SmartInvest Alpha Index Hedging Disruption”); or (f) the SmartInvest Alpha Index Sponsor determines that an
event or circumstance has occurred that is beyond the reasonable control of the SmartInvest Alpha Index Sponsor for reasons including,
but not limited to, a systems failure, fire, building evacuation, natural or man-made disaster, act of state, armed conflict,
act of terrorism, riot or labor disruption (the “SmartInvest Alpha Index Force Majeure Event”).
In the event
of a SmartInvest Alpha Index Price Source Disruption, the SmartInvest Alpha Index Sponsor may, in its sole discretion: (a) provide
data from alternative sources (including Reuters, Bloomberg and/or Morgan Stanley data) to the index calculation agent of the
SmartInvest Alpha Index; (b) direct the index calculation agent of the SmartInvest Alpha Index to make such determinations and/or
adjustments as it considers appropriate to determine the level of the SmartInvest Alpha Index by reference to the prevailing market
conditions and the last available traded or published price of such SmartInvest Alpha Index Component; or (c) take any of the
actions outlined below.
In the event
that the SmartInvest Alpha Index Sponsor determines that a SmartInvest Alpha Index Disruption Event, other than a SmartInvest
Alpha Index Hedging Disruption or SmartInvest Alpha Index Force Majeure Event, has occurred the SmartInvest Alpha Index Sponsor
may in its sole discretion: (a) make such determinations and/or adjustments to the terms of the index methodology of the SmartInvest
Alpha Index and/or the underlying SmartInvest Alpha Index Components as it deems necessary; (b) defer the availability of the
level of the SmartInvest Alpha Index or the rebalancing of the SmartInvest Alpha Index until the next business day on which there
is no SmartInvest Alpha Index Disruption Event; or (c) instruct the index calculation agent of the SmartInvest Alpha Index to
permanently cease to calculate and make available the level of the SmartInvest Alpha Index.
In the event
of a SmartInvest Alpha Index Hedging Disruption or SmartInvest Alpha Index Force Majeure Event, the SmartInvest Alpha Index Sponsor
may in its discretion (a) make such determinations and/or adjustments to the terms of the index methodology for the SmartInvest
Alpha Index as it deems necessary; (b) direct the index calculation agent of the SmartInvest Alpha Index to defer the availability
of the level of the SmartInvest Alpha Index until the next business day on which there is no SmartInvest Alpha Index Hedging Disruption
or SmartInvest Alpha Index Force Majeure Event; or (c) permanently cease to calculate and make available the level of the SmartInvest
Alpha Index.
Description of Index Methodology
for the Morgan Stanley SmartInvest Alpha 5% Volatility Target Index
The Morgan Stanley
SmartInvest Alpha 5% Volatility Target Index (the “SmartInvest Alpha Volatility Target Index”) is a quantitative,
rules-based, equity index developed by Morgan Stanley & Co. International plc. The SmartInvest Alpha Volatility Target Index
adds a target volatility strategy onto the outperformance strategy of the SmartInvest Alpha Index, and seeks to achieve a dynamic
allocation to the SmartInvest Alpha Index and cash (each, a “SmartInvest Alpha Volatility Target Index Component”)
based on the comparison between the prior rolling 20-day realized volatility of the SmartInvest Alpha Index (the “Realized
Volatility”) and a target volatility of 5% (the “Volatility Target”). The SmartInvest Alpha Volatility Target
Index is calculated, published and rebalanced by Morgan Stanley India Services Private Limited or any Morgan Stanley affiliates
designated as successor thereto, as index calculation agent. The inception date for the SmartInvest Alpha Volatility Target Index
was April 28, 2011.
Index
Review and Rebalancing
Each business
day, the index calculation agent carries out index review and allocates the SmartInvest Alpha Volatility Target Index as necessary
so that the exposure to the SmartInvest Alpha Index (the “Equity Exposure”) is equal to the desired allocation to
the SmartInvest Alpha Index, determined as the ratio of the Volatility Target to the Realized Volatility. We refer to this allocation
as the “Equity Allocation,” and the day on which such rebalancing is required is called a “Rebalancing Date.”
On such Rebalancing Date, the Equity Exposure will be reset to be the quotient of (a) the product of the Volatility Target and
the index closing level of the SmartInvest Alpha Volatility Target Index on such Rebalancing Date and (b) the index closing level
of the SmartInvest Alpha Index on such Rebalancing Date. The new Equity Allocation determined on such Rebalancing Date will be
effective on the first business day succeeding such Rebalancing Date.
Index
Calculation
The level of
the SmartInvest Alpha Volatility Target Index was set to 1,000 as of the index base date, May 2, 2001. The live date of the SmartInvest
Alpha Volatility Target Index was April 28, 2011. The SmartInvest Alpha Volatility Target Index is calculated on an end-of-day
basis, except in the event of certain SmartInvest Alpha Volatility Target Index Disruption Events (as defined below), and is based
on the ratio of the Volatility Target to the Realized Volatility. The SmartInvest Alpha Volatility Target Index is expressed in
U.S. dollars.
The level of
the SmartInvest Alpha Volatility Target Index is calculated on each business day as the sum of (a) the index closing level of
the SmartInvest Alpha Volatility Target Index on the prior business day and (b) the product of (i) the Equity Exposure on the
prior business day and (ii) the difference between the index closing level of the SmartInvest Alpha Index on such business day
and the index closing level of the SmartInvest Alpha Index on the prior business day.
If the Realized
Volatility is equal to the Volatility Target, the Equity Exposure will be 100%. If the Realized Volatility is less than the Volatility
Target, the Equity Exposure will be increased, subject to the maximum exposure of 200%. If the Realized Volatility is greater
than the Volatility Target, the Equity Exposure will be decreased and the cash exposure will be increased. The cash exposure generates
no return. The allocations will be adjusted on each business day, but only if the change of allocations would be in an amount
greater than 5%.
The Equity Exposure
is thus determined by the ratio of the Volatility Target to the Realized Volatility, subject to a maximum exposure of 200%, with
any remaining exposure allocated to cash and generating no return. For example, if the Realized Volatility over the prior rolling
20-day period is 4%, the Equity Exposure will be set to 125% (5/4). If the Realized Volatility is 6%, the Equity Exposure will
be set to approximately 83.33% (5/6), and the exposure to cash (which generates no return) will be approximately 16.67% (1/6).
Adjustments
for SmartInvest Alpha Volatility Target Index Disruption Events
In the event
of a SmartInvest Alpha Volatility Target Index Disruption Event, the SmartInvest Alpha Volatility Target Index is adjusted to
ensure that the SmartInvest Alpha Volatility Target Index continues to reflect, as closely as possible, the value of the index
components.
“SmartInvest
Alpha Volatility Target Index Disruption Event” means, whether due to a SmartInvest Index Market Disruption Event, a SmartInvest
Alpha Index Market Disruption Event or otherwise, (a)(i) the SmartInvest Alpha Volatility Target Index Sponsor or the index calculation
agent for the SmartInvest Alpha Volatility Target Index determines that any of the source data required to calculate the SmartInvest
Alpha Volatility Target Index is not available or (ii) there is any permanent calculation or prolonged suspension of a SmartInvest
Alpha Volatility Target Index Component (the “SmartInvest Alpha Volatility Target Index Price Source Disruption”);
(b) the SmartInvest Alpha Volatility Target Index Sponsor determines that there has been a material change to the methodology
used to calculate a SmartInvest Alpha Volatility Target Index Component or there has been a material change in the constituents
of a SmartInvest Alpha Volatility Target Index Component (the “Material Change in SmartInvest Alpha Volatility Target Index
Component Methodology”); (c) the SmartInvest Alpha Volatility Target Index Sponsor determines there has been a termination,
revocation or suspension of any third party license agreement or permission pursuant to which data is supplied to compile or calculate
the SmartInvest Alpha Volatility Target Index or a SmartInvest Alpha Volatility Target Index Component (the “SmartInvest
Alpha Volatility Target Index Termination of Data License”); (d) there has been a change in applicable law or regulation
that prevents the SmartInvest Alpha Volatility Target Index Sponsor and/or the index calculation agent for the SmartInvest Alpha
Volatility Target Index from calculating and/or publishing the SmartInvest Alpha Volatility Target Index (the “SmartInvest
Alpha Volatility Target Index Change in Law”); (e) the SmartInvest Alpha Volatility Target Index Sponsor determines that
we and/or any of our affiliates would be unable, after using commercially reasonable efforts, to (i) acquire, establish, re-establish,
substitute, maintain, unwind or dispose of any transactions or instruments it deems necessary to hedge its position in relation
to any securities issue or other relevant transactions relating to or calculated by reference to the SmartInvest Alpha Volatility
Target Index, or (ii) realize, recover or remit the proceeds of any such transactions or instruments (the “SmartInvest Alpha
Volatility Target Index Hedging Disruption”); or (f) the SmartInvest Alpha Volatility Target Index Sponsor determines that
an event or circumstance has occurred that is beyond the reasonable control of the SmartInvest Alpha Volatility Target Index Sponsor
for reasons including, but not limited to, a systems failure, fire, building evacuation, natural or man-made disaster, act of
state, armed conflict, act of terrorism, riot or labor disruption (the “SmartInvest Alpha Volatility Target Index Force
Majeure Event”).
In the event
of a SmartInvest Alpha Volatility Target Index Price Source Disruption, the SmartInvest Alpha Volatility Target Index Sponsor
may, in its sole discretion: (a) provide data from alternative sources (including Reuters, Bloomberg and/or Morgan Stanley data)
to the index calculation agent of the SmartInvest Alpha Volatility Target Index; (b) direct the index calculation agent of the
SmartInvest Alpha Volatility Target Index to make such determinations and/or adjustments as it considers appropriate to determine
the level of the SmartInvest Alpha Volatility Target Index by
reference to
the prevailing market conditions and the last available traded or published price of such SmartInvest Alpha Volatility Target
Index Component; or (c) take any of the actions outlined below.
In the event
that the SmartInvest Alpha Volatility Target Index Sponsor determines that a SmartInvest Alpha Volatility Target Index Disruption
Event, other than a SmartInvest Alpha Volatility Target Index Hedging Disruption or SmartInvest Alpha Volatility Target Index
Force Majeure Event, has occurred the SmartInvest Alpha Volatility Target Index Sponsor may in its sole discretion: (a) make such
determinations and/or adjustments to the terms of the index methodology of the SmartInvest Alpha Volatility Target Index and/or
the underlying SmartInvest Alpha Volatility Target Index Components as it deems necessary; (b) defer the availability of the level
of the SmartInvest Alpha Volatility Target Index or the rebalancing of the SmartInvest Alpha Volatility Target Index until the
next business day on which there is no SmartInvest Alpha Volatility Target Index Disruption Event; (c) instruct the index calculation
agent of the SmartInvest Alpha Volatility Target Index to permanently cease to calculate and make available the level of the SmartInvest
Alpha Volatility Target Index; or (d) instruct the index calculation agent of the SmartInvest Alpha Volatility Target Index to
use data from alternative sources (including Reuters, Bloomberg and/or Morgan Stanley data) to determine the relevant price of
a SmartInvest Alpha Volatility Target Index Component.
In the event
of a SmartInvest Alpha Volatility Target Index Hedging Disruption or SmartInvest Alpha Volatility Target Index Force Majeure Event,
the SmartInvest Alpha Volatility Target Index Sponsor may in its discretion (a) make such determinations and/or adjustments to
the terms of the index methodology for the SmartInvest Alpha Volatility Target Index as it deems necessary; (b) direct the index
calculation agent of the SmartInvest Alpha Volatility Target Index to defer the availability of the level of the SmartInvest Alpha
Volatility Target Index until the next business day on which there is no SmartInvest Alpha Volatility Target Index Hedging Disruption
or SmartInvest Alpha Volatility Target Index Force Majeure Event; or (c) permanently cease to calculate and make available the
level of the SmartInvest Alpha Volatility Target Index.