Svensk outperformers 'interesting': advisor; Barclays ties to commodities strategy; Goldman links to S&P By Kenneth Lim

Boston, Feb. 21 - AB Svensk Exportkredit's recently priced banking sector outperformance notes are an interesting way to play out a strategy, but could be too much of a niche product for most retail investors, said investment advisors from Blue Bell Private Wealth Management.

"[Underwriter] Goldman Sachs' strategists obviously feel that the bank index will outperform the total financial services index, which means that in a market like this, you want to be in banks rather than the financial sector as a whole," Blue Bell managing partner Scott Miller Jr. told Prospect News.

"But it's strictly a strategy call. With our clients, we do more of an index-linked, liked the S&P, kind of investment. We don't necessarily advise our clients on these products that much."

Svensk said earlier in the week that it sold $101.76 million of its 0% outperformance notes tied to a long position in the S&P 500 Banks index and a short position in the S&P Financial Select Sector index via Goldman, Sachs & Co.

The notes, which are due Aug. 31, 2009, will pay par plus the difference between the two index returns if the long index outperforms the short index. The payout at maturity will be par minus the difference between the two index returns if the long index underperforms the short index.

Scott Miller Sr., Blue Bell's managing partner and chief investment officer, said an outperformance structure potentially gives investors more ways to make money.

"One of the nice things about structured investments is it's a way to play out a strategy," Miller Sr. said. "You could take a long only or a long up only strategy that will produce only x return. You could use the long only strategy and accelerate it. But their feeling at Goldman appears to be that the long/short strategy works best because they could feel that the banks sector could stay flat and the financial sector could fall. So you're not necessarily taking a whole lot less risk - you can't lose more than your principal, and it's a way to still make money if both indices do poorly. That's what's interesting about it."

Although an outperformance product could yield positive returns even when the underlyings are down, investors must do their research before taking the plunge, he added.

Miller Sr. noted a more retail-oriented outperformance product offered by Morgan Stanley in November 2007 that was long on the S&P 100 and short on the Russell 2000.

"That was essentially large cap versus small cap, and the retail-oriented firms had been talking about that for some time," he said. "In reality, since that November pricing, we're looking about three months later, the underperformance has been 1.3%. Believe it or not, the Russell has done better than the 100."

Besides underperformance, the risks involved include a lack of divergence between the two underlyings. In the Svensk product's case, the calculation is also point-to-point, which means that a huge outperformance at the start of the product's term could be worthless if the outperformance narrows over the life of the notes.

Some of those risks might be possible to work around. Blue Bell advocates a "ladder approach" to hedge against point-to-point risks. That approach essentially diversifies the time periods of products in a portfolio so that "we get something coming every month," Miller Sr. explained.

"We're not trying to time the market in any shape or form," he said.

Outperformance products so far have been more on the sophisticated side, but Miller Sr. said the structure could be gaining ground in the retail market.

"What you're seeing from Goldman is basically a private wealth type of investment," he said. "I do think you'll see more of this in the future that will trickle down to investment advisors like us."

Barclays links to commodity strategy

Barclays Bank plc announced an offering of accelerated return notes linked to the Barclays Capital Commodity Strategy 1501.

The strategy, which is run by the bank, is designed to reflect the excess returns available by using a dynamic allocation process to invest in futures contracts on 20 physical commodities at the optimal points on the commodity curve. The strategy comprises hypothetical long positions on each of the commodities, and the positions are rebalanced every month.

If the final strategy daily value is greater than the initial value, investors will receive par plus the return times the upside leverage factor of between 120% and 130%.

Investors will receive par for losses up to 20% and will share in losses beyond 20%.

The notes will price on Feb. 29.

Barclays Capital Inc. will be the agent.

Goldman ties to S&P 500

Goldman Sachs on Thursday priced $300 million of enhanced participation notes due 2009 linked to the S&P 500 Index.

The deal came hot on the heels of a $200 million offering by Morgan Stanley of 0% Buffered Performance Leveraged Upside Securities (PLUS) on Wednesday also linked to the S&P 500.

The Goldman notes will return par plus double every percentage point increase in the index, subject to a cap at 8.66% for the index increase, plus a supplemental return of 2.15% if the final index level increases above the initial index level of 1,348.78.

If the final index level decreases by not more than 2%, investors will receive par plus the supplemental return. Investors will share in any index decrease beyond 2%.

The Morgan Stanley PLUSes will pay par plus 1.75 times the index increase if the index finishes higher than the initial value, capped at a return of 23.3625%. If the index ends between the downside protection value at 98% of the initial value and the initial value, the payout will be par. The notes have full exposure if the index falls below the downside protection value, but there is a minimum payout of $20.

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