GS Finance’s notes tied to Motif Capital National Defense index seen as push into theme bets

By Emma Trincal

New York, July 12 – GS Finance Corp. plans to price 0% notes due July 31, 2024 linked to the Motif Capital National Defense 7 ER index, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be guaranteed by Goldman Sachs Group, Inc.

If the index return is positive, the payout at maturity will be par plus 200% to 215% of the index return. The exact upside participation rate will be set at pricing. If the index return is zero or negative, the payout will be par.

The index tracks the stocks of public companies that derive at least 10% of their revenue from defense-related sales, principally of weapons systems to U.S. and foreign governments.

The underlying investment theme around defense stocks is the obvious driver for investors in the notes.

Another one perhaps just as important, sources said, is the reputation of the index-maker.

Motif is a broker-dealer as well as a digital wealth and trading platform based in Silicon Valley.

Motifs

Motif’s founder and chief executive, Hardeep Walia, explains in his website how he tried seven years ago to invest in the mobile internet sector but found no ETF that could adequately cover this concept.

“My friends told me to buy Apple,” he said.

Investors can use the Motif platform to create their own “motifs,” he said, or “intelligently” weighted baskets of up to 30 stocks or ETFS.

“Motif is a pretty hot Fintech, using crowdsource best in breed portfolios,” said an industry source.

“Their baskets are a little bit different. There is definitely cachet to a Motif portfolio. GS was smart to partner with them.”

Goldman licensing

In May of last year, Goldman Sachs indeed announced that it decided to license Motif’s thematic indexes to issue structured investments.

A month later, Motif launched an index called Motif Capital Aging of America 7 ER index, which illustrates the thematic approach. This index offers exposure to stocks of companies in the health care and real estate sectors that may benefit from the long-term demographic shift toward an older population in the United States.

Deals

Data compiled by Prospect News showed that despite the buzz, volume and deal sizes on these indexes remain limited so far this year.

GS Finance this year has issued five deals tied to the Motif Capital Aging of America 7 ER index totaling less than $4 million. In the spring, the issuer brought to market less than $1 million in four note offerings tied to an equally weighted basket of Motif Capital and National Defense 7 ER index and the Motif Capital National Defense 7 ER. Finally a $645 million basket-linked note deal priced in April based on the Motif Capital National Defense 7 ER.

The offerings, however, come to market on a regular basis, usually monthly. In addition, Goldman Sachs Bank USA is simultaneously issuing a number of certificates of deposits linked to both indexes.

Ladder climbing

Sources suggested that partnering with Goldman Sachs to deliver the same thematic baskets in structured notes may be a good move for both parties.

“Goldman has been getting huge in the ETF business in the last two years. This alliance with Motif is probably an opportunity for them to maximize their presence in both spaces. They’re climbing the ladder. And you know Goldman, whenever they can make money they’ll do it,” said Gray.

Others point to the way Goldman stands to benefit its partner.

“Using Motif as a thematic index provider and Solactive as their calculation agent is a very slick and nimble way for Goldman to generate compelling and fresh ideas as well as supplying the dealer distribution channel with commissionable products that stand apart in their uniqueness from other financial products,” the industry source said.

“I would guess that this also removes GS from any advisory role within their own product issuance by utilizing Motif as the index sponsor.”

ETF evolution

“They’ve been around for quite a while. The idea is to customize, focus on one theme. I need a basket of video game stocks...They’ll grab them,” said Wes Gray, chief executive of Alpha Architect.

“It’s a pretty cool concept. Unfortunately for them the ETF industry has evolved. Right now there is an ETF for almost everything people could imagine.

“You want exposure to baby doll manufacturers? Maybe there’s an ETF out there.

“After a huge PR campaign, they sort of fell off the radar. It looks like the ETFs ate their lunch.”

Terms and volatility

The absence of a cap and full protection represented “attractive terms,” a structurer said. But it comes with some concessions.

“It’s a long-dated note linked to an index with a volatility target. This makes the whole thing cheaper,” he said.

The index has a volatility target of 7%. As a result, warns the prospectus, a very significant allocation may go to cash, in fact up to 92%.

The volatility control is designed to lower the downside risk when investing directly in the index. But the notes themselves provide full downside protection. This represents a disadvantage for investors when the 7% target limits the upside, the prospectus explained.

“You’re getting good pricing each time you combine high dividend stocks and low volatility,” said a second industry source.

A good story

While notional sales of notes linked to Motif indexes have not reached high amounts, the concept continues to intrigue market participants.

“Motif is not exactly an index sponsor. They’re more than that. It’s a boutique that delivers theme-driven investments. Some are complicated themes like minimum variance portfolio or risk premium,” said a market participant.

One advantage of thematic investing is its marketability.

“A note tied to a specific theme is always going to be a story to tell. People like to hear stories. ETFs are great investments. They’re very liquid and cheap,” he said.

“If you’re a broker there is no money to be made in ETFs.

“A lot of structured products are sold and brokers like it because it pays more in commission.

“Investors like it too. They may want to use an investment theme with a defined payout, and you don’t get the defined payout in an ETF.”

Goldman Sachs & Co. is the underwriter.

The notes are expected to price on July 26.

The Cusip number is 40054LJJ4.

The index was first launched on June 1, 2016. The calculation agent is Solactive AG. The index is sponsored by Motif Capital Management, Inc.

There are 48 constituent stocks in the index.

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