Advisers object to GS Finance’s $4.11 million buffered notes on S&P due to cap, cost

By Emma Trincal

New York, June 26 – GS Finance Corp.’s $4.11 million of 0% buffered PLUS due July 3, 2024 linked to the S&P 500 index disappointed advisers because of the insufficient upside potential and minimal downside protection as well as the cost. Both advisers consulted about the notes had a relatively bullish outlook on the market.

If the index return is positive, the payout at maturity will be par plus 200% of the index return, subject to a maximum return of par plus 12.45%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index declines by 5% or less and will lose 1% for every 1% that it declines beyond 5%.

Bullish consensus

“At first appearance it looks like an okay structure. It’s not a worst-of. It’s the S&P, the core of any asset allocation. Short-term. Two-times leverage,” said Carl Kunhardt, wealth manager at Quest Capital Management.

“But then there is this 12.5% cap.”

“We’re coming out of a market low in 2022. Despite all the talk about inflation and recession, we’re having a good year so far. The consensus is that we’re looking at a fairly good year in 2023.”

For Kunhardt, the much-anticipated economic recession has already happened.

“We had a prolonged downturn already last year from January to October.”

The S&P 500 index during that period dropped 27.6%.

Kunhardt said he does not expect stock prices to collapse over the first half of next year.

“Overall, sentiment is positive. I go more on sentiment. The big dislocations are pretty much behind us.”

Cap, buffer

Based on this view, the 12.45% cap was problematic.

“Even if we have a quarter or two of poor returns, with that 2x leverage, I’ll blow right through the cap.”

“The cap is holding me back. You can do 12% in a year without the leverage. So, this leverage is not doing anything for me.”

Because of his bullish forecast, Kunhardt said the downside protection was not all that necessary.

“The 5% buffer is moot. I usually love to have a solid buffer. But the consensus is bullish. Besides 5% is nothing. The buffer is completely underwhelming.

“I might as well be long.”

Fee

But perhaps the biggest downside with the note was its cost.

The 2.25% fee disclosed in the prospectus was “not an option,” he said.

“I first looked at this note and thought...oh well, that’s not a bad note, just a note that’s not giving me a lot of value. But at 2.25% a year, I’ll take a pass. It’s way too expensive.”

Keep on rallying

Steven Foldes, wealth manager and founder of Evensky & Katz/Foldes Financial Wealth Management, shared a similar view.

“Each note expresses a view but this one doesn’t solve much of anything,” he said.

“You would have to think that the market will be very modestly positive since you’re not getting a lot of downside protection here.”

Usually, he noted, reduced amounts of downside protection are offset with a bullish upside potential, which was not the case with this offering.

“We’re still more than 10% off the high of January 2022 and you’re going to cap yourself out at 12.45%,” he said.

“Over the next 12 months we could have a nice rally especially if the Fed is done raising rates and if we find some resolution to the problem with Ukraine.”

The notes, he said, did not meet his bullish outlook.

“I can see the market rising much higher a year from now. I wouldn’t want to be capped out at 12.45%.”

Unsolved situations

Even in a non-bullish scenario, the notes may fail to meet investors’ expectations.

“If things aren’t going very well, you really don’t have enough downside protection with a 5% buffer.”

Overall, Foldes said the notes did not seem to be designed for a particular type of investor.

“You’re not getting a lot of upside.

“You’re not getting a lot on the downside.

“If you’re in a range-bound market, you’re not getting a lot of bang for your buck.”

Pricey

He also criticized the fee amount.

“We don’t have a problem with Goldman’s credit.

“But a fee of 2.25%, that’s pretty high. This is not very satisfactory at all.

“The note doesn’t solve for a good market. It doesn’t solve for a bad market even if the decline is modest.

“Ultimately, you’re capped on the upside, and you’re capped at a modest level.

“I’m not sure where they’re going with this.

“It’s definitely not something we would consider for our clients.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent. Morgan Stanley Wealth Management is the dealer.

The notes settled on Thursday.

The Cusip number is 40057RYF9.

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