GS Finance’s leveraged buffered notes on basket offer global exposure tool for allocators

By Emma Trincal

New York, Jan. 9 – GS Finance Corp.’s 0% leveraged buffered notes due Jan. 13, 2025 linked to a basket of indexes may help advisers having a hard time deciding how much to allocate to U.S. stocks versus international equity.

The underlying basket consists of the S&P 500 index, the Euro Stoxx 50 index and the Russell 2000 index, each with a 33.33% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus 1.123 times the basket gain.

Investors will receive par if the basket finishes flat or falls by up to 35% and will lose 1% for every 1% decline beyond 35%.

By offering global market exposure in one note, this deal offers a slightly different approach to asset allocation, said Steve Doucette, financial adviser at Proctor Financial.

Global play

Typically buyers of structured notes will either allocate to domestic equity or to international markets, rarely to both at the same time. That is, notes structured on a global market strategy are not that often seen, according to data compiled by Prospect News.

The exposure via notes to the U.S. is overwhelmingly done via the S&P 500 index or a combination of this index with the Dow Jones industrial average and the Russell 2000 index. Most of those plays are done on a single index-basis or a worst-of, rarely via a weighted basket.

For international allocation investors routinely invest in notes tied to single indexes such as the Euro Stoxx 50 index for the euro zone, the MSCI EAFE index for developed countries (ex-North America) and the MSCI Emerging Markets ETF index for emerging markets.

Unusual basket

When it comes to weighted baskets however, choices are extremely limited, according to the data.

The most common basket is an international equity underlying. Used in many notes, the unequally weighted basket gives exposure to five indexes, each representing a developed market and serving as a proxy to the EAFE index.

But a basket mixing different market capitalizations across Europe and the U.S. as this one does is relatively unusual, according to the data.

“As we do our global allocation, we typically do one note on the S&P, one note on emerging markets, one note on the Euro Stoxx or the EAFE,” said Doucette.

“Here you’re getting it all in one note.”

Doucette is not sure it entirely helps.

Weighting and thesis

“It all depends on what percentage you put in the U.S. versus international,” he said.

“You can structure your allocation target around this – two-thirds U.S., one-third international – if it’s in line with your view.

“But do you want to overweight the best-performing asset class, meaning the U.S? The percentage allocation is a question of what your global allocation view is.”

That view is mixed at the moment among many investors coming out of one of the best years of the U.S. bull market. The urge to stay invested in what has worked so well so far in the past 10 years – namely the U.S. market – remains investors’ natural inclination.

Domestic bias

In their structured notes’ purchasing decisions, U.S. investors are notoriously focused on domestic markets, as evidenced by the overwhelming majority of structured notes linked to the S&P 500 index.

It’s understandable since U.S. stocks have outperformed international markets for several years.

The MSCI Emerging Markets index returned 24% over the past 10 years, the MSCI Emerging Markets index, 7.6%. Meanwhile, the S&P 500 index finished the decade up 179%.

However, with the U.S. benchmarks still climbing to new highs almost daily, many analysts recommend diversification away from the U.S. The performance gap though does not offer a great incentive to move assets into foreign markets. Last year, the MSCI EAFE index and the MSCI Emerging Markets index were up 22% and 17%, respectively.

While strong, these returns underperformed the S&P 500 index, up nearly 29%.

Secondary market

Doucette is inclined to think that over-allocating to the U.S. may be risky given current valuations. The cheaper international stocks may also offer value.

“The fact that it’s in one note is convenient. But you have to be comfortable with the weightings,” he said.

“One clear advantage is for trading. Invariably, we have to trade these notes. One note instead of three, that’s an advantage.

“It’s one or two fewer notes to trade.”

Regarding the terms, Doucette would want to see more leverage.

“There might be a way to twist those terms to see if you can catch more leverage although five years out, I’m comfortable with a 35% buffer.

“But I’d to work toward more leverage,” he said.

International

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said he liked the composition of the basket.

“The indices in this note are long-term components to an asset allocation strategy,” he said.

“As we look at the S&P, we have some concerns with the high valuation.

“However, we’re getting a considerable amount of international exposure in this basket.”

He did not just refer to the 33.33% weight of the Euro Stoxx 50 index. Companies in the S&P 500 index have a high and growing portion of their revenues coming from international markets, he said.

“It’s kind of diversified in and of itself,” he said.

“The S&P is almost a global diversifier. The basket is just adding the small-cap and European components.”

Structure

For Medeiros, the note and its underlying basket made asset allocation much easier.

“For my core asset allocation decisions, I would go into a bucket like this,” he said.

The terms were also seen as compelling.

“It’s not just the underlying. It’s being able to hold the indices with downside protection.

“I don’t mind the five year.

“The buffer is in line with what I would expect with these indices.

“And the leverage in this case is a nice enhancement to the strategy.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes will settle on Monday.

The Cusip number is 40056Y6E9.

© 2015 Prospect News.
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