Equity Risk Managed Strategy –

A Cost Efficient Protected Equity Solution for Pension

Schemes and Insurers
Richard Lockwood and Mark Pemberton

FOR PROFESSIONAL CLIENTS ONLY. FOR EXCLUSIVE USE AT IDEAS LONDON. NOT FOR ONWARD DISTRIBUTION. CRC 2939230 Exp.: 02/07/2021
Outlook
Over the Medium-term We Expect a Turn in the Cycle an Increase in Volatility
Morgan Stanley Business Cycle Indicator • 2019 - almost perfect synchronisation of
2.5
a volatility trough and a peak in business
0.5 cycle
(1.5)

(3.5) • Emerging consensus

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
– over medium-term horizon, cycle
USA Euro Area
likely to take a downturn

VIX – while volatility is likely to see a

60 commensurate increase
40
• Investors that share these concerns are
20
generally considering how to de-risk their
0 Strategic Asset Allocation
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
The statements above reflect our views and opinions as of the date hereof and not as of any future date and will not be updat ed or supplemented.
Data source: Bloomberg. Calculation Source: Morgan Stanley.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 2

Reflecting A Cautious Outlook in the Strategic Asset Allocation
Most of the Typical Asset Classes Used to De-risk Institutional Portfolios Are
Currently Trading at Expensive Levels vs their Long Term Average
Cheap Expensive
• If selling equities to buy the majority of these asset classes
5y Euro Gov Bond
investors are
5y Treasuries

Euro Inflation-linked Bonds

– trading the largest source of potential upside

US Inflation-linked Bonds – replacing with a lower source of potential growth which is

Euro IG over valued

US IG
• ERM – a useful asset allocation tool
Global Securitized
– Allows investors to maintain equity risk premium
Euro Leveraged Loans

US Leveraged Loans – Providing explicit downside protection

Euro High Yield
– Avoids the risk trade off described above
US High Yield
The statements above reflect our views and opinions as of the date hereof and not as of any future date and will not be updat ed or supplemented.
Data as at end December 2019.
Valuations compare current metric to the range over the last 10 years. Metrics: YTM for Government and Inflation-Linked, OAS for IG, Securitized and High Yield, Price for Loans
Data sources: Eurozone Generic Govt 5yr yield, US Generic Govt 5yr yield, EUR Germany Govt Inflation Linked 5yr yield, Bloomberg Barclays US Inflation-linked 0-5yr yield, EUR IG All Sectors OAS, US IG All Sectors OAS, Bloomberg Barclays Global Agg Securitized
YTW, S&P/LSTA European Leveraged Loan Index (price), S&P/LSTA Leverage Loan Price Index, Bloomberg Barclays Pan-European HY Avg OAS, Bloomberg Barclays US Corporate HY Avg OAS

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 3

MSIM Equity Risk Managed (ERM) Fund

TARGET OUTCOMES:

• Efficient exposure to an equity premium with constant risk profile

• Asymmetric participation with explicit downside protection

• Cost effective downside protection

• Reduce SCR for insurance companies (no basis risk)

KEY FEATURES:

• Simple systematic rules-based implementation

• Dynamic asset allocation between a factor equity portfolio and risk free asset to maintain constant volatility level

• Fractional option overlay strategy to explicitly protect the portfolio NAV

This information has been prepared solely for information purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The above represents the views and opinions of
MSIM as of the date hereof and not as of any future date. Market developments may cause reassessment of these views at any time, and, consequently, these views may change at any time.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 4

Equity Risk Managed Fund - Investment Process

The statements above reflect our views and opinions as of the date hereof and not as of any future date and will not be updat ed or supplemented.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 5

1. Factor Investing 1

2 3

• Empirical research has identified risk factors that can be persistently rewarded over time

• A portfolio focusing on capturing rewarded systematic factor exposures whilst targeting maximal diversification can generate an attractive risk
adjusted return

• The investment algorithm is an equal-weighted factor portfolio that we have identified as being efficient, rewarded and persistent

FACTOR DESCRIPTION

Investing in stocks that are undervalued with respect to other securities based on certain valuation metrics which
Value:
include price-to-earnings and price-to-book ratios

Size: Investing in mid- and small-cap stocks

Investing in stocks that have outperformed the broader market in the past with momentum expected to continue to
Momentum:
outperform in the near future

Volatility: Investing in stocks with low historical volatility

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 6

2. Risk Control Process 1

2 3

ON A DAILY BASIS WE MEASURE THE VOLATILITY ON THE EQUITY FACTOR PORTFOLIO:

• If volatility equals the target level, we maintain full equity exposure

• If volatility is below the target level, we maintain full equity exposure

• If volatility is above target level, we allocate to cash to reduce volatility back to target

15% Underlying Asset Volatility 20% Underlying Asset Volatility 10% Underlying Asset Volatility

33%
Strategy Composition

Cash
50%
Cash

100%
Equity
67%
50%
Equity
Equity

Illustrative Example

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 7

3. Option Overlay Strategy 1

2 3

CHALLENGE WITH SIMPLE EUROPEAN PUT OPTION: SOLUTION: FRACTIONAL PUT OVERLAY

• Protecting a portfolio with 1-year put options such that initial value • 39 puts with maturities ranging from 13 weeks to 52 weeks.
cannot fall below pre-determined level
• Each put has a notional value of 1/39th of NAV.
‒ This approach can have a high level of basis risk and pin risk.
• Every week shortest option is sold and new 52 week option is
‒ Theta decay can erode the value of the put options. purchased.

• The options are sold before they reach 3 months to expiry.

• This approach reduces basis and pin risk and theta decay

Illustrative Moving Average Protection from Fractional Put Overlay

175
150
125
100
75
50
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Data Source: Bloomberg. Data for Dec 2006 – Apr 2017.Calculation Source: Morgan Stanley.
Past performance is not a reliable indicator of future performance and should not be relied upon in making investment decisions..

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 8

Asymmetric Return Profile, Inception to 31 December 2019
Beta Analysis
Apr17 – Feb18: Feb18 – May18: May18 – Sep18: Sep18 – Feb19: Mar19 – Nov19:
Average Average Average Average Average
Beta: 92% Beta: 74% Beta: 90% Beta: 54% Beta: 80%

140%
120
120%
110
100%
100
80%
90

Beta
NAV

60%
80

70 40%

60 20%
16/02/18 28/12/18
55% Beta 34% Beta
50 0%

ERM Beta ERM

For illustrative purposes only. Full set of assumptions available upon request. Data source: Bloomberg. Calculation Source: Morgan Stanley.
Data Range 10/04/17 – 22/11/19. ERM: FAGRMAE ID Equity, MSCI World: MXWOHEUR Index. Beta: Fund Delta Exposure to the Underlying Equity Factor Portfolio.
Past performance is not an indicator of future results.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 9

Return/SCR Ratio
Backtest Plus Realised Since Inception to December 2019
STRATEGY AVG. IRR AVG SCR IRR / SCR
MSIM Equity Risk Managed Fund 5.3% 12.5% 0.42

MSCI World Net Total Return EUR Hedged 6.6% 39.0% 0.17 IRR and SCR calculated over 3Y rolling windows
Inception Date
10 April 2017
1.0
0.8
0.6
0.4
IRR/SCR

0.2
0.0
(0.2)
(0.4)
12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 12/19

ERM MSCI World

For illustrative purposes only. Past performance is not a reliable indicator of future performance and should not be relied upon in making investment decisions.
Source: Morgan Stanley, Bloomberg. The performance data refers to historically simulated data between Dec 2006 and April 9, 2017. The ERM Fund was launched on April 10, 2017 and actual data is presented from this date forward. The performance data prio r to
April 10, 2017 does not represent realised performance and is sensitive to a number of assumptions. The backtested results are generated with the benefit of hindsight. While backtested results reflect the application of the methodology, they are inherently limited by the
fact that they do not represent actual trading results or the performance of an actual portfolio. Therefore, this back-tested hypothetical performance may not be indicative of how the Fund would have actually performed in the past or can be expected to perform in
the future.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 10

Awards in Insurance Asset Management

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 11

Risk Warnings

The Equity Risk Managed Fund is a sub-fund of FundLogic Alternatives Plc, an Irish domiciled umbrella UCITS. Applications for shares in the Fund should not be made without first consulting the current Prospectus, Key Investor
Information Document ("KIID"), Annual Report and Semi-Annual Report (“Offering Documents”), or other documents available in your local jurisdiction which is available free of charge from http://sp.morganstanley.com/FUNDLOGIC/
The value of the investments and the income from them can go down as well as up, and an investor may not get back the amount invested. There can be no assurance that the Strategy will achieve its investment objectives. The risk factors set
out in the section entitled Risk Factors in the Prospectus apply.
The following additional risk factors also apply:
Counterparty Risk: The Sub-Fund will be exposed to the credit risk of the parties with which it transacts and may also bear the risk of settlement default. Credit risk is the risk that the counterparty to a financial instrument will fail to discharge
an obligation or commitment that it has entered into with the Sub-Fund. This would include the counterparties to any FDI or repo that it enters into. Trading in FDI which have not been collateralised gives rise to direct counterparty exposure. The
Sub-Fund mitigates much of its credit risk to its counterparties by receiving collateral with a value at least equal to the exposure to each counterparty but, to the extent that any FDI is not fully collateralised, a default by the counterparty may
result in a reduction in the value of the Sub-Fund. The Company maintains an active oversight of counterparty exposure in line with Regulations and the collateral management process in respect of the Sub-Fund. The restrictions on cash
collateral as set out in the section entitled Efficient Portfolio Management in the Prospectus shall apply. Where cash collateral is re-invested it will be subject to the same risks as direct investments as set out in the section entitled Risk Factors in
the Prospectus.
Counterparty Replacement Risk: The Sub-Fund will take exposure to the Portfolio Strategy via a swap. This swap is customised and gaining this exposure via a swap is dependent on the availability of a counterparty. The Sub-Fund intends to
use an Approved Counterparty, as a counterparty to the swap, however, if the Approved Counterparty is unable to continue as counterparty to the swap, the Sub-Fund will need to find an alternative counterparty for an equivalent swap. If the
Sub-Fund is unable to source an alternative counterparty it may seek to implement the Portfolio Strategy directly but this may mean that the Sub-Fund is unable to implement its investment strategy fully.
Low Exposure to Portfolio Strategy: As explained in the section headed “Investment Policy” in the Prospectus, if the realised volatility of the Investment Portfolio exceeds 10% there is a risk that there will be low or even no exposure to the
Portfolio Strategy for certain periods. In this case, Shareholders will be exposed to overnight interest rates which might be negative.
Performance Impact of Selling Call Options: The sale of call options within the Option Hedging Strategy will cap the performance of the Portfolio Strategy at 104% of the prevailing level of the Portfolio Strategy from the strike date until the
expiry of the call option. As such the Sub-Fund’s participation in the Portfolio Strategy upside will be limited. This may result in the Sub-Fund underperforming the Portfolio Strategy.
Partial Protection of NAV: Whilst the Sub-Fund will implement the Option Hedging Strategy with the aim of protecting a proportion of the Portfolio Strategy in the event of material falls in the value of the Portfolio Strategy, this protection only
partially protects the Sub-Fund’s NAV and is reliant on the solvency of the counterparty to the Portfolio Swap.
Currency Risk: The Sub-Fund’s performance may be influenced by movements in currency exchange rates because the Investment Portfolio may hold securities positions that are not denominated in the Base Currency of the Sub-Fund. The
Base Currency of the Sub-Fund is Euro. Shareholders may subscribe in USD, Euro, Pound Sterling, or into the USD, EUR or GBP denominated Share classes respectively. The EUR and GBP denominated Shares are Hedged Share Classes.
To the extent that Share class currency hedging is successful, the performance of a Hedged Share Class is likely to move in line with the performance of the Sub-Fund’s underlying assets; however, Shareholders in a Hedged Share Class will
not benefit if the currency of that Hedged Share Class falls against the Base Currency and/or the currency in which assets of the Sub-Fund are denominated. Shareholders in the Hedged Share Classes are urged to read the section of the
Prospectus entitled Hedged Share Classes for information on the currency risks associated with investment in those Share classes. Depending on a Shareholder’s currency of reference, currency fluctuations between that currency and the
Base Currency may adversely affect the value of an investment in the Sub- Fund. Changes in exchange rates may have an adverse effect on the value, price or income of the Sub-Fund.
Deposit Risk: An investment in the Sub-Fund is not in the nature of a deposit in a bank account and is not protected by any government, government agency or other guarantee scheme which may be available to protect the holder of a bank
deposit account.
Active Management Risk: The Investment Manager decides the composition of the Portfolio Strategy and so the success of the Sub-Fund depends, among other things, upon the ability of the Investment Manager to manage the asset
allocation within the Portfolio Strategy. No assurance can be given that the Investment Manager will be successful in managing the Portfolio Strategy. Moreover, decisions made by the Investment Manager may cause the Sub-Fund to incur
losses or to miss profit opportunities on which it may otherwise have capitalized. Additionally, the management of the Portfolio Strategy will result in brokerage and other transaction costs to which the Sub-Fund will be indirectly exposed.
Shareholders will have no right or power to participate in the day-to-day management or control of the business of the Sub-Fund, or an opportunity to evaluate the determination of (and any changes to) the specific strategies used, or
investments made, by the Investment Manager within the Portfolio Strategy or the terms of any such investment.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 12

Risk Warnings Cont’d.

Impact of the valuation of Off Exchange Derivatives on the Net Asset Value of the Sub-Fund: The Sub-Fund invests in derivatives, the valuation of which depends on multiple market parameters. Thus, Shareholders will not be able to
derive the Net Asset Value of the Sub-Fund from an increase of the level of the Portfolio Strategy alone.

Options: Options are not for everyone. Before engaging in the purchasing or writing of options, investors should understand the nature and extent of their rights and obligations and be aware of the risks involved, including the risks pertaining to
the business and financial condition of the issuer and the underlying stock. A secondary market may not exist for these securities. For customers of Morgan Stanley & Co. LLC who are purchasing or writing exchange-traded options, your
attention is called to the publication “Characteristics and Risks of Standardized Options”. That publication, which you shoul d have read and understood prior to investing in options, can be viewed on the Web at the following address:
http://www.optionsclearing.com/about/publications/character-risks.jsp.

Spreading: Clients engaging in the execution structure known as Spreading should understand that Spreading may also entail substantial commissions, because it involves at least twice the number of contracts as a long or short position and
because spreads are almost invariably closed out prior to expiration. Potential investors should be advised that the tax treatment applicable to spread transactions should be carefully reviewed prior to entering into any transaction. Also, it
should be pointed out that while the investor who engages in spread transactions may be reducing risk, he is also reducing hi s profit potential. The risk/ reward ratio, hence, is an important consideration. The risk of exercise in a spread position
is the same as that in a short position. Certain investors may be able to anticipate exercise and execute a "rollover" transaction. However, should exercise occur, it would clearly mark the end of the spread position and thereby change the
risk/reward ratio. Due to early assignments of the short side of the spread, what appears to be a limited risk spread may have more risk than initially perceived. An investor with a spread position in index options that is assigned an exercise is at
risk for any adverse movement in the current level between the time the settlement value is determined on the date when the exercise notice is filed with OCC and the time when such investor sells or exercises the long leg of the spread. Other
multiple-option strategies involving cash settled options, including combinations and straddles, present similar risk.

Investments may be in a variety of currencies and therefore changes in rates of exchange between currencies may cause the val ue of investments to decrease or increase. Furthermore, the value of investments may be adversely affected by
fluctuations in exchange rates between the investor’s reference currency and the base currency of the investments. For investments in emerging markets, the volatility and risk to your capital may be greater due to potential price volatility,
political and/or economic risks. Debt securities may not be rated by a recognized rating agency. Strategies that specialize in a particular region or market sector are more risky than those which hold a very broad spread of investments. Where
portfolio concentration is in one sector it is subject to greater risk and volatility than other portfolios that are more diversified and the value of its shares may be more substantially affected by economic events in the real estate industry.
Investments in derivative instruments carry certain inherent risks such as the risk of counter party default and before investing you should ensure you fully understand these risks. Use of leverage may also magnify losses as well as gains to the
extent that leverage is employed.

Past performance is not a guarantee of future performance. The value of the investments and the income from them can go down as well as up and an investor may not get back the amount invested. There can be no assurance that the
Strategy will achieve its investment objectives. These investments are designed for investors who understand and are willing to accept these risks. Performance may be volatile, and an investor could lose all or a substantial portion of his or her
investment.

Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the
applicable licensor and it shall not have any liability with respect thereto.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 13

Distribution
This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

Ireland: Morgan Stanley Investment Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson's, Quay, Dublin 2, Ireland. Registered in Ireland under company number 616662. Regulated by the Central Bank
of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square,
Canary Wharf, London E14 4QA. Germany: Morgan Stanley Investment Management Limited Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG).
Italy: Morgan Stanley Investment Management Limited, Milan Branch (Sede Secondaria di Milano) is a branch of Morgan Stanley Investment Management Limited, a company registered in the UK, authorised and regulated by the Financial
Conduct Authority (FCA), and whose registered office is at 25 Cabot Square, Canary Wharf, London, E14 4QA. Morgan Stanley Investment Management Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso
Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 08829360968. The Netherlands: Morgan Stanley Investment Management, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands.
Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of Morgan Stanley Investment Management Limited. Morgan Stanley Investment Management Limited is authorised and regulated by the Financial
Conduct Authority in the United Kingdom. Switzerland: Morgan Stanley & Co. International plc, London, Zurich BranchI Authorised and regulated by the Eidgenössische Finanzmarktaufsicht ("FINMA"). Registered with the Register of
Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 14

For Professional Clients Only This presentation and the information contained herein (collectively referred to as the “Presentation”) is for exclusive use at the MSIM Ideas Conference (12 – 13 February 2020). This Presentation was issued
and approved in the United Kingdom by Morgan Stanley Investment Management Limited (“MSIM”), 25 Cabot Square, Canary Wharf, London E14 4QA. Authorised and regulated by the Financial Conduct Authority.

The views and opinions expressed here are of the presenting portfolio managers and are subject to change based on market conditions. They are not the views of all the portfolio managers of MSIM or of the firm as a whole. Except as otherwise
indicated herein, the views and opinions expressed herein are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently
becomes available or circumstances existing, or changes occurring, after the date hereof.

All information contained herein is proprietary and is protected under copyright law and may not be reproduces or distributed to any other persons. In addition, this Presentation is not an offer, or a solicitation of an offer, to buy or sell any
security or instrument or participate in any investment strategy. All information provided is for informational purposes only and should not be deemed as a recommendation to buy or sell securities in the sectors and regions referenced.
Information regarding expected market returns and market outlook is based on the research, analysis, and opinions of the presenter. These conclusions are speculative in nature, may not come to pass, and are not intended to predict the future
of any specific MSIM investment.

Past performance is no guarantee of future results. Any information regarding expected market returns and market outlook is based on the research, analysis, and opinions of the presenter. They are based on current market conditions and
subject to change. In addition, these conclusions are speculative in nature, may not come to pass, and are not intended to predict the future of any specific Morgan Stanley investment. No representation or warranty can be given with respect to
the accuracy or completeness of the information

All investments involve risks, including the possible loss of principal. The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any
way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

This Presentation is based on information generally available to the public from sources believed to be reliable. Morgan Stanley disclaims any and all liability relating to these materials, including, without limitation, any express or implied
representations or warranties for statements or errors contained in, or omissions from, this information. Certain assumptions may have been made in the preparation of this information.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent.

All information contained herein is proprietary and is protected under copyright law

© 2020 Morgan Stanley. All rights reserved.

IDEAS CONFERENCE 2020 MSIM EQUITY RISK MANAGED FUND 15