Goldman's two buffered notes linked to MSCI AC World offer diversification, bullish plays

By Emma Trincal

New York, March 1 - Goldman Sachs Group, Inc. is planning two offerings of 0% leveraged buffered index-linked notes linked to the MSCI All Country World index for investors seeking global equity exposure. The two offerings are designed for two different types of bulls, sources said.

The first note is shorter in duration and has more upside leverage but is capped. Its tenor is expected to be 18 to 21 months.

The payout at maturity will be par plus triple any index gain, subject to a maximum return of 13.5% to 15.75% that will be set at pricing.

The second one has a longer duration and provides less leverage but has unlimited upside. The expected duration is 36 to 42 months, and the leverage factor will be 1.15 to 1.35 times the index return with no cap.

Both products have the same downside protection feature. The payout is par if the index declines by 15% or less, and investors will lose 1.1765% for every 1% that the index declines beyond 15%, according to two 424B2 filings with the Securities and Exchange Commission.

The shorter-dated note with the three-times leverage factor and the cap is for moderate bulls, sources said, as investors who would be more aggressively bullish would not want the cap and would be ready to accept less leverage, as it is the case with the other product, which fits the more bullish profile.

The world

Steve Doucette, financial adviser at Proctor Financial, said that he likes both structures, although he would prefer the one with the tenor of 18 to 21 months.

"I would go for the shorter one given that three years is our maximum and they're pushing out the other one to 42 months," he said.

"My problem with this note is not the structure. It's the underlying."

Doucette said that in general, he avoids investing in sector-specific indexes or single stocks as he prefers broader benchmarks.

"But this one is too broad. It includes everything," he said.

The MSCI All County World index is a benchmark for developed and emerging equity markets. As of Monday, the index offered exposure to the equity market indexes of 45 countries including 24 developed market countries and 21 emerging market countries.

The top geographic weightings are the United States (45.44%), the United Kingdom (8.38%), Japan (7.94%) and Canada (4.43%).

The top emerging market countries in the index are China (2.34%) followed by Brazil (2.05%) and Korea (1.9%).

Doucette said that he would like the structure of the short-term product if the product were linked to a more specific region, especially Europe, given the buffer.

"You could look at something more European-based, and the structure would give you some protection. You would get a little bit of leverage and a little bit of buffer on the European side of the global market," he said.

"I could look at Europe. I could look at the U.S. I could do emerging markets. But I don't want to include the whole world.

"It includes emerging markets, for instance, and I would want to look at emerging markets in a different way. I wouldn't put emerging markets in a structure where you're capped.

"Same thing with the U.S. If it's overweight U.S., I want to take that out in a separate note."

Smaller pieces

Doucette said that the index would not fit his asset allocation style because he likes to break down exposures into smaller themes.

"What we do is look at smaller asset class groups: the U.S. market, the emerging markets, Europe, small caps, mid caps, large caps. We break it down," he said.

"We'd take each of these pieces [and] put a note on each of those without allocating too much in percentage to each.

"We tend to ladder these notes by protection type, leverage, exposure.

"This product would overlay everything we do on a bunch of six, seven or eight notes.

"It's a global equity index note. It looks like it was designed for a bond guy who needs some equity exposure who wants to keep it simple and who doesn't want to do too much homework."

Diversification advantage

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said that he likes the underlying index for the notes.

"When the markets are as volatile as they are now, it's important to have a deeper diversification," he said.

"There are a bunch of countries in this index, and I like many of them, for instance in Europe France and Germany. The broad diversification dampens the volatility.

"I also like the heavy weighting on the U.S., especially in this market environment."

If he had to choose between the two products, Medeiros said that he would choose the note with the unlimited upside despite its longer tenor.

"If I'm going to take on leverage, I don't want to be capped. If I choose to take on equity risk, I need to be rewarded for it," he said.

Goldman Sachs & Co. is the underwriter of both upcoming notes.

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