Goldman’s buffered PLUS with cap tied to Stoxx 50 show shorter term, aggressive cap

By Emma Trincal

New York, June 6 – GS Finance Corp.’s buffered Performance Leveraged Upside Securities due Jan. 5, 2021 linked to the Euro Stoxx 50 index showed a slightly different profile from its peers. As most Euro Stoxx-linked notes have longer durations and no caps, this one showed opposite attributes, according to data compiled by Prospect News.

As a barrage of negative political news is coming from Southern Europe, putting political tensions on the forefront, the structure was also designed to be defensive with a 10% buffer.

The payout at maturity will be par of $10 plus double any index gain, up to a 75.1% cap, according to a 424B2 filing with the Securities and Exchange Commission.

Cough and sneezes

Andrew Valentine Pool, main trader with Regatta Research & Money Management, said he is still bullish on European markets. His main concern is how Europe may react if the U.S. economy entered into a recession.

“We think Europe should still be doing well for the next couple of years. They are behind their recovery curve and we can see ourselves selectively adding money to this asset class,” he said.

Recent headlines from Europe may be of concern for some investors. Pool was not one of them.

“We had this political crisis last week in Italy and also in Spain. To us it’s mostly noise,” he said, adding that his investment style is geared toward asset allocation with a long-term approach.

“The big question for us is if the U.S. economy manages to slow down a couple of years from now, how resilient Europe would be. That’s the wildcard.

“I don’t expect a significant slowdown in the U.S. But our job as portfolio managers is to keep that in mind when we make decisions on behalf of our clients.”

Modest allocation

For that reason, Pool was unsure whether the 10% buffer included in the product would be sufficient.

“It’s always nice to have a buffer and it would be even nicer to have a bigger buffer. But we realize that with a 75% cap on a two-and-a-half year note, there’s always a tradeoff.

“We would purchase it but as a small percentage of our portfolio having already plenty of Euro Stoxx notes.”

The Euro craze

A structured notes distributor catering to registered investment advisers was less sanguine about the European stock market.

“With what’s happening overseas, a lot of RIAs we talk to are not getting into the Euro Stoxx right now. They’re just not comfortable,” he said.

“For a while, before the election of Donald Trump, the story was: you had to invest in Europe as part of your portfolio diversification strategy if the U.S. happened to not perform well. That theme worked, especially with attractive valuations seen over there. The story has changed however. The U.S. economy has become really strong and keeps on getting stronger. Now that people are seeing the results of what our president is doing, the case for European equity doesn’t resonate as well.”

Substitute only

This distributor said he is not encouraging his clients to add more to their European equity buckets.

“The terms of the notes are good. But I wouldn’t put new money in the Euro Stoxx at this point... Now if you sell one note and replace it with this one that has a 10% buffer, at least you’re not adding more. You can maintain your exposure with some protection.

“I would play this note that way. I’d use it as a substitute. I wouldn’t introduce it as a new strategy,” he said.

A different one

The structure of the notes differs from the average Euro Stoxx 50 product seen so far this year, according to data compiled by Prospect News.

First, its tenor is shorter, with the average term over three years. Second, 75% of deals linked to the European benchmark are uncapped. There is a correlation between the “no-cap” feature and the time horizon of the product.

The average tenor of uncapped notes is 3.6 years while capped products, such as this one, showed an average maturity of 1.88 years.

A 75% cap is on the upper end of the range. Only a couple of small deals showed the highest cap at 100%, the lowest one after that being 78.5% on a 15-month security, according to the year-to-date data.

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

The notes are guaranteed by Goldman Sachs Group, Inc.

The notes will price on June 15 and settle on June 20.

The Cusip number is 36254G747.

© 2015 Prospect News.
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