Barclays’ buffered SuperTrack notes linked to indexes seen as source for alpha

By Emma Trincal

New York, Aug. 29 – Barclays Bank plc’s 0% buffered SuperTrack notes due Sept. 3, 2021 linked to a basket of two indexes enable investors to potentially outperform the market in both rallies and bear markets, said a financial adviser. The basket composed of a mix of U.S. and European equity can also be helpful as an asset allocation tool, said a portfolio manager.

The basket consists of the S&P 500 index with a 75% weight and the Euro Stoxx 50 with a 25% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.325 times any basket gain, with the exact upside leverage to be set at pricing.

Investors will receive par if the basket falls by up to 20% and will be exposed to any losses beyond 20%.

Issuer, basket

“This is very compelling all the way around,” said Michael Kalscheur, financial adviser at Castle Wealth Advisors.

“It’s a high-quality lender with very tight spreads. That’s excellent.”

Barclays’ five-year credit default swap rates are 48 basis points, at the same level as Wells Fargo & Co., which is the best credit among large U.S. banks, according to Markit.

The fact that the payout was not structured as a worst-of but simply tied to the performance of a basket was another positive, he said.

“Both indexes are very well-known. I’m not going to quibble over the fact that it’s not 50/50. It’s not just the S&P.”

Investors in any structured notes only get exposure to the price return of an index, not the dividend, he noted comparing the dividend yields of the S&P 500 index at 1.88% with that of the Euro Stoxx at 2.43%.

“Maybe that’s where you’re getting a little pop in the terms. You’ve got leverage and no cap. You’re giving up a little bit more income with the Euro Stoxx which gives you more to buy better terms,” he said.

The “better terms” were seen both on the return enhancement side and on the protection, he added.

Downside protection

Starting with the downside, Kalscheur said he was happy to see a 20% protection in the form of a buffer.

“It’s a hard buffer. Not a cliff, which is how we call barriers. We don’t like barriers. But a buffer is good and 20% is a solid protection level,” he said.

Kalscheur analyzes risk on the structured notes he purchases using back tested performance he collects.

For the S&P 500 index, he said he possesses data going back 67 years ago. The track record he has for the Euro Stoxx however is shorter as it begins in 1987.

In the past 67 years the S&P 500 index fell by more than 20% only 4.8% of the time on a four-year rolling period, according to his firm’s tables.

The shorter back-tested period for the Euro Stoxx 50 suggested a greater level of risk with a 24% probability.

“It’s significantly more, but to be fair our data starts in 1987, which is a bad year. You’re starting off on a bad footing right on the get-go,” he said.

“It’s also a shorter timeframe, which gives the results less creed. The allocation is also lower.”

This back-of-the-envelope analysis gave Kalscheur a sense of comfort.

“Is this basket going to be down 20% or more? I don’t think so.

“I would have a high degree of confidence showing this to a client,” he said.

Four-year term

The four-year terms were not a drawback for this financial adviser, who likes to offer his clients longer-maturity notes.

“We actually prefer the long-term issues. We haven’t got to seven year yet. That’s harder to predict. We stay to that four- to six-year range,” he said.

Longer-dated notes offer two advantages in his view. First the chances of losing principal are lower over long periods of time, he said. Second, longer notes are a good fit for his investment style.

“That backs up our investment philosophy of taking a long-term approach, which is a principle we’re trying to teach our client to value.”

No cap

The buffer and the term made the product a good option for conservative investors.

The combination of leverage and uncapped upside would also appeal to bulls, he noted.

“On the upside, it’s uncapped. And you’re taking 132% of that.”

Assuming a 10% annual growth in the basket consistent with historical averages, the notes would outperform the indexes thanks to the upside leverage, he reasoned.

“You completely make up for the loss of dividend. The leverage compensates you significantly if you have a good market or a very good market,” he said.

Clear directions

The only way the notes would fail to beat the underlying benchmarks would be if the performance of the basket was choppy.

“You could be losing out only if the market has no clear direction...If it is up low-single digits. If it’s slightly up or slightly down, then you may not make up for the dividends.

“But you can’t control every single scenario. What’s for sure is that under a good market or a bear market, you’re going to do better than the market.

“This is a good offering. I would have no problem recommending this to a client,” he said.

Alternative to robos

Marc Gerstein, research consultant at Portfolio 123, said that he has seen worse structured note deals in the past.

“This one doesn’t suck. It’s actually a good one. At least there is a rationale to it,” he said.

One positive way to use the notes would be as an alternative to a robo-advisor.

Robo-advisors, which most broker-dealers now offer, are algorithms that make the process of asset allocation automatic and tailored to the client’s investment profile.

“This might actually be a better way to construct a portfolio,” Gerstein said.

“It gives you upside leverage and downside protection that you couldn’t get in a standard robo-advisor.”

The main concession for investors was to accept the relative uncertainty around the secondary market liquidity of the notes.

“The only downside would be the possible lack of liquidity. This is not for someone who needs their money short term,” he said.

“But if you’re comfortable with the lack of liquidity, if you’re comfortable with Barclays’ credit this would be a nice addition to a general asset allocation portfolio. You could use this for the equity portion and add a fixed-income ETF and you would have something more interesting than the robo.”

Barclays is the agent.

The notes will settle on Friday.

The Cusip number is 06744CHM6.

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