GS Finance’s capped airbag gears tied to MSCI EAFE offer international value, advisers say

By Emma Trincal

New York, Sept. 17 – GS Finance Corp.’s 0% capped airbag gears due Sept. 13, 2022 linked to the MSCI EAFE index give investors exposure to an undervalued asset class for investors seeking value and diversification away from the highs of the domestic equity market, advisers said.

If the index return is positive, the payout at maturity will be par plus 1.5 times the index return, subject to a maximum return of 22%. Investors will receive par if the index falls by up to 12.3% to 13.3% and will lose 1.1403% to 1.1534% for each 1% index decline beyond the buffer. The exact buffer amount and multiple will be set at pricing.

Historical standard

Steve Doucette, financial adviser at Proctor Financial, said the notes provide an opportunity to tap into an asset class that has been languishing for years. Contrarians and value players may find it enticing.

“This is a note that gives you exposure to this international space,” he said.

“Stocks in the non-U.S. developed markets have really been underperforming. It’s not a tech-heavy index like the S&P.

“If tech continues to drive the market to new highs, you might regret having invested in that. But more and more strategists are saying: these international stocks are fairly valued.

“And the truth is historically you always get some sort of mean reversion.”

Laggard

The MSCI EAFE index over the past three years has generated 0.73% in average annual return compared to 11.5% for the S&P 500 index.

The underlying index tracks the equity markets in Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

The portfolio is overweight Europe with approximately 60% of the index. Japan is the top region with a 25% weighting.

“Europe, Japan, Australia are not hot spots right now. They’ve been underperforming a lot,” said Doucette.

“10% plus a year is a reasonable return. I can’t imagine this index will be much more than that over the next two years.”

Geared buffer

The downside also offered attractive terms, he said.

“The 12% buffer is good.

“That asset class has hardly done anything. So, if the market turns there’s less to go down. You might outperform on the downside.”

The gearing of the buffer was not a problem for this adviser.

“The incremental downside is there. But it’s a long way down before you underperform.”

More upside

If he had to modify the structure, Doucette may look into adding more potential return.

“I would probably cut the buffer a little bit, maybe to 10%,” he said.

The decision to either increase the leverage multiple or the cap was more delicate to make.

“Having enough leverage and a good cap is a good combination. You may hit it right.

“But leverage works two ways. Sometimes, leverage is a dirty word.

“When the market is up the value of the notes is up too. But when the market turns, it comes down a lot.

“The more leverage you add, the more discrepancies you may find between the value of the notes and the price of the underlying. You need to pay attention to that before considering liquidating.”

This point, he said, is important for this adviser who is not always holding structured notes to their term but may sell them prior to maturity.

Diversifying abroad

Matt Medeiros, president, and chief executive of the Institute for Wealth Management, said he liked the notes overall although the geared buffer was not his favorite part of the deal.

“The EAFE index has been lagging the U.S. and it has been so for quite some time,” he said.

“I like the asset class from a diversification standpoint.

“We have an underweight allocation to the EAFE in our portfolio. We don’t want too much exposure because we don’t see much growth potential currently.”

The euro zone economy, which is already slow, has been negatively impacted by the Covid-19-induced crisis along with all parts of the world.

“Many of us are hoping that developments to fight the pandemic will bring economic improvements to the euro zone.

“But the European markets are still lagging the U.S.,” he said.

Structure

The terms of the notes however were for the most part attractive.

“I don’t like the gearing on the buffer, but I understand it,” he said.

The component was “interesting” but perhaps limited to specific investors.

“Individual clients would find the gearing a bit challenging to consider,” he said.

Medeiros added that he is “fine” with the 22% cap.

“I like the leverage too, especially given that it’s been a slow-growing asset class for some time.”

The two-year maturity was reasonable.

“Overall, the leverage, the cap and the buffer are consistent with the term of the notes.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the underwriter with UBS Financial Services Inc. as selling agent.

The notes were expected to price on Sept. 11 and settle on Sept. 16.

The Cusip number is 36259L618.

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