GS Finance’s buffered notes linked to MSCI ACWI ex USA offer broad exposure to world markets

By Emma Trincal

New York, Sept. 16 – GS Finance Corp.’s 0% buffered notes due Sept. 21, 2021 linked to the MSCI ACWI ex USA index provide diversified exposure to international equity markets for modestly bullish investors concerned about volatility.

If the index return is positive or zero, the payout at maturity will be par plus the index return, subject to a maximum payout of $1,251 per $1,000 of notes, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par plus the absolute value of the index return if the index declines by up to 10% and will lose 1% for each 1% decline beyond 10%.

Broad benchmark

Carl Kunhardt, wealth adviser at Quest Capital Management, said he “loved the note,” starting with the underlying index.

“The MSCI ACWI is very similar to the EAFE, but it’s more broad-based. It’s a better representation of the international market,” he said.

The underlying index is designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies.

It represents 22 of the 23 developed equity markets (excluding the U.S.) and the 26 emerging equity markets.

“The EAFE has a European bias, whereas this one doesn’t.”

The EAFE index, a benchmark for developed equity markets ex-North America, allocates more than 60% to European stocks. In contrast, the European bucket currently accounts for 39% of the MSCI ACWI index.

This cap can’t hurt

Because Kunhardt already allocates 15% to 25% of his portfolio to international equity using this benchmark, his evaluation of the note boiled down to one question: “Am I better off long the index or holding the position through the note?”

Without hesitation he chose the latter.

“Usually I prefer active management with emerging markets, but in this case, I’m OK doing passive investing because it’s a diversified mix of developed and emerging markets,” he said.

“I don’t like caps, but a cap is only an issue if it’s going to limit your performance. I don’t anticipate that.

“I’m not very bullish, so the cap doesn’t bother me.”

He explained that his return expectation for this benchmark does not exceed 8% to 9% a year.

Investors in the notes are capped at about 12% a year. Assuming a “loss of dividends” of 3% per annum, the “real cap” becomes 9% per year, he said.

The 12-month trailing yield of the MSCI ACWI ex USA index is 2.52%. Its distribution yield is 3.63%.

“The cap is not taking my dividends away because I don’t anticipate a huge upside. At best, I see a 9% total return, which is exactly the cap minus dividends. I’m neutral.”

Sweet pot

The downside payout was the most attractive part of the deal.

“It’s a true buffer, not a barrier. I only have 10%, but if I breach I still keep my 10%. I’d rather have a 10% hard buffer than a 30% barrier,” he said.

“Then you’re going to sweeten the pot by telling me I’m getting the absolute return. That’s sugar on a candy.

“The cap doesn’t really hurt me.

“I have a broad exposure to international equity plus a hard buffer and absolute return.

“What’s not to like?”

Strong downside

For investors with a range-bound view on international markets, the notes would be a good choice, said Jerry Verseput, president of Veripax Financial Management.

“Over two years, if the index was flat or slightly down, you’d have a small window where it would outperform the notes, but it would be insignificant” he said.

Otherwise, the notes would outperform the index on the downside as the buffer is greater than the dividend amount. For instance if the price return was negative 10%, the index fund would deliver a 5% total return versus a 10% gain from the notes. Any decline beyond 5% would see the notes outperform. The outperformance percentage benefiting the notes would be the greatest between negative 5% and negative 10% due to the effect of the absolute return payout.

“It’s pretty much an all win on the downside,” he said.

Leverage missing

The benefit of the note was not as visible on the upside.

“There is no leverage to offset the lack of dividends. You’re already giving up 5%, and you have a 25% cap, so you really have a 20% cap, or 10% a year if you take into account the no-dividends,” he said.

“You need to be mildly bullish to own that.

“If you’re pretty optimistic, you wouldn’t want to own it.

“If you’re bearish, you wouldn’t want to own it.

“I would probably want to see more leverage. Especially if you’re moderately bullish, you need the benefit of the leverage.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes (Cusip: 40056XDB9) are expected to settle on Thursday.

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