Barclays' buffered Super Track notes linked to S&P GSCI may not appeal to bulls due to low cap

By Emma Trincal

New York, Jan. 28 - Barclays Bank plc's 0% buffered Super Track notes due Feb. 9, 2017 linked to the S&P GSCI Excess Return index offer limited appeal due to a low cap that would prevent investors from realizing substantial gains if the underlying asset class were to rebound, which many expect could happen within the three-year timeframe of the notes, financial advisers said.

The payout at maturity will be par plus any index gain, up to a maximum return of 18% to 22%. The exact cap will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 15% and will be exposed to any losses beyond 15%.

Unloved asset class

"We haven't seen that many products tied to commodities lately. Performance in the asset class has not been so great. Investors' attention has focused primarily on equities," said Mike McGlone, director of research at ETF Securities.

"The index replicates the performance of a production-weighted basket of commodities. But the investor is not buying the physical commodities. They don't have the facilities to store and to pay for storage. The index is not investable. You have to track the price of the underlying futures contracts."

The S&P GSCI Excess Return index tracks both the price of the S&P GSCI index and the discount or premium obtained by rolling hypothetical positions in those contracts forward as they approach delivery, according to the prospectus.

While there is little demand for commodity-linked notes among retail investors at this point, financial advisers said that the commodities market may pick up momentum again given the losses seen over the past few years. Last year for instance, the S&P GSCI index declined by 1.2%, while the S&P 500 was up 32.4%.

Not exciting

"There are two ways to look at this. One is to analyze the structure. The other is to examine the relevance of wanting to be in a commodities-based note, which is more of an investment decision," said Dean Zayed, chief executive of Brookstone Capital Management.

"In terms of the structure, this is not very impressive. Obviously, we like real buffers. A 15% real buffer is a strong feature.

"But the cap is low. For somebody who wants commodity exposure, this is not horrible, but it's not super attractive either. It's right in the middle.

"There is a decent downside protection, a decent cap, but you don't get the most exciting terms."

Because individual commodity prices may be highly volatile, as stated in the prospectus, Zayed said he would have expected a higher cap.

"I guess they used the volatility mostly in pricing the hard buffer," he said.

Contrarian play

From an investment standpoint, a bottom may be near for commodities, sources said, in which case, capping the upside too low may penalize risk-taking investors.

"We see very few commodities notes. It's simply because the performance has not been good. There is not a lot of demand, and there is a lot of fear," Zayed said.

"Commodities have been out of favor. There can be a contrarian play here. Just like everybody started the New Year bullish on stocks and bearish on bonds, and look at what we have: bonds have trumped stocks in January.

"After several years of underperformance, things could turn around."

But for investors expecting growth in commodities, the notes may pose some risk on the upside, he noted.

"Going long commodities may be an interesting strategy for some people right now," he said.

"It doesn't mean it's the right note, but it could be the right kind of exposure for a contrarian."

However, such "contrarian" investor would have to be only moderately bullish.

"You would have to believe that the asset class could yield positive returns but not some double-digit gains. That's a strange view if you're bullish and anticipate a rebound."

Zayed said he would not consider the notes.

"If I want to go commodities, given the perceived volatility in this asset class I wouldn't want to see my returns capped at that low level. I would be looking for more growth given the risk," he said.

Killer cap

Steven Foldes, president and chief executive of Foldes Financial Management LLC, agreed. The asset class, he said, has the potential to generate attractive returns, which the cap would partially eliminate.

"This is really something we would not do," Foldes said.

"And the reason is simple: It's a three-year note with a very modest cap. A cap of 18% to 22% on a three-year is a non-starter. If we don't think we can make money in excess of what the underlying asset class can do, we don't consider it. Divide it by three and this cap provides for a very small return, especially for an asset class that has been beaten down. We would want substantial returns if there is any regression to the mean."

The S&P GSCI index was down in 2013, 2012 and 2011, he said, posting only a single-digit return in 2010.

"If anything, our expectation for having it in our portfolio would not [be] just to use it as a diversifier. We would expect to be able to generate high returns. Think of 2007, when this benchmark was up 31%. That cap of 6% to 7% a year is an absolute non-starter," he said.

While the 15% buffer is a "nice thing to have," Foldes said that a smaller buffer and a higher cap would have made more sense for an investor willing to invest in the underperforming asset class.

"Commodities prices can be highly volatile. I would have expected pricing to be better. We would have probably been able to settle for a smaller buffer of 10%, for instance. But my guess is that it would have probably taken us to a 25% to 30% cap, and that's still not enough for us."

Pricing pressures

"I do understand that volatility is so low these days, it's hard to find attractive terms in general. We're finding very modest pricing on most notes. We had two notes maturing in November, one in U.S. small-cap, and the other in emerging markets. We reached out to issuers, and the result of our reverse inquiry was disappointing. We ended up buying mutual funds and ETFs instead," Foldes said.

"Although we are aware that pricing is tight, we think this 18%-20% cap is killer for us. We would never do anything like that.

"As a rule, we don't buy notes that can't deliver more than 15% compounded a year.

"This one has no leverage. It has some downside protection. But it's a three-year, and there is a terrible cap. That wouldn't be for us at all."

Barclays is the agent.

The notes will price Feb. 6 and settle Feb. 11.

The Cusip number is 06741T4Y0.

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