JPMorgan's $23.12 million notes tied to MSCI Emerging Markets well bid due to cap, protection

By Emma Trincal

New York, Aug. 18 - The combination of a high-cap and almost a full downside protection made JPMorgan Chase & Co.'s $23.12 million of 0% capped notes due Aug. 18, 2016 linked to the iShares MSCI Emerging Markets index fund a popular deal when it priced on Monday, sources said.

The payout at maturity is par plus any fund gain, up to a maximum return of $1,850 per $1,000 principal amount, according to a 424B2 filing with the Securities and Exchange Commission.

Investors are exposed to losses, with a minimum payout of 90% of par.

J.P. Morgan Securities LLC was the agent.

Attractive cap

Noting that the cap for the five-year term is 85%, Steve Doucette, financial adviser at Proctor Financial said that, "The recent volatility highs have increased the upside on those deals."

He added that the success of the deal derived in part from the "high" cap - 17% on an annualized basis.

"Seventeen percent is not a bad return. A lot of people would be happy with that," he said.

Investors benefit from a principal protection of nearly their entire principal, being guaranteed to receive at least 90% of their initial investment at maturity, subject to credit risk.

"The opportunity to get 17% a year on emerging markets with a 90% protection...that's a fantastic deal," said Matt Medeiros, president and chief executive at the Institute for Wealth Management.

Emerging markets bulls

Medeiros said that he also liked the underlying asset class, being bullish on emerging markets.

The MSCI emerging markets fund replicates the returns of the index carrying the same name. The index is a widely used benchmark for emerging markets equity and consists of 21 country indexes in Latin America, Eastern Europe, Asia and Africa.

"Obviously emerging markets have grown very rapidly and should continue to grow," Medeiros said.

Emerging market equity is a volatile asset class, he said, and performance may suffer when the global economy begins to stagnate.

"But I still like this asset class," he said.

"Even if we are to face a global economic slowdown, the growth in these markets will be proportionally greater than a lot of the developing countries.

"In addition, having a 90% downside protection for this asset class is very attractive," he said.

First losses

Not everyone agrees that having a 90% downside protection is necessarily a good thing in itself.

"I think it depends on what you pay for it," said Doucette.

"If I could get a protection on my first losses in a buffer instead, I would rather have that. I would even give up some of the upside for a 30% buffer.

"I know it's an easier sale to tell people: you're never going to lose more than 90%. And that's probably why the deal was successful.

"But I always ask myself: what's my risk return for that? And am I paying too much for that kind of protection?"

"I personally don't see the need for a 90% protection if I have to give up the first 10%," he said.

He took the following example: he compared the notes with a similar product but one that would offer a 30% buffer even with a lower cap.

"Imagine that the stock is down 40%. With my 30% buffer, I'm down 10%. Same thing with these notes: down 10%," he said.

"But you have five years and a lot can happen in five years.

"Imagine the stock now going back up from minus 40% and finishing down 30%.

"With these notes, you lose 10%. That's a given."

"With my buffer, I get my principal back," he said.

Doucette added that the 90% protection was certainly attractive to many investors.

"But I don't know how much it cost me really," he said. "I have no idea if a buffer would be more expensive."

"All I know is that I prefer to do it the other way: protect my first losses rather than having them exposed right away," he said.

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