Bank of Montreal's $90 million notes get sizeable bid thanks to appeal of Raymond James picks

By Emma Trincal

New York, Dec. 19 - Bank of Montreal's $90 million of 0% senior medium-term notes, series B, due Dec. 24, 2012 linked to a basket of 13 stocks was a big success, sources said, due to the underlying equity picks. But the fees may be an issue, two financial advisers said.

The underlying basket comprised stocks selected in December by the equity research department at Raymond James & Associates, Inc. as the "Raymond James Analysts' Best Picks for 2012." These stocks are expected to sustain operational growth and price appreciation over a 12-month period, according to a 424B2 filing with the Securities and Exchange Commission.

"It's a very good size, and I'm sure it has to do with the basket," said Carl Kunhardt, wealth adviser at Quest Capital Management.

"It gives investors access to Raymond James equity research.

"Because of the reputation of Raymond James, because of the historical performance they have been able to post year after year, I can see why this would be appealing," he said.

Cost

The notes, according to the prospectus, cost investors 3% as a result of a premium paid upfront and a redemption payment paid at maturity.

The notes priced at 102.75.

The payout at maturity will be par of $1,000 plus the basket return minus a redemption adjustment amount of $2.50 per note. As a result, the basket must appreciate by at least 3% for investors to receive a positive return on the notes.

Kunhardt, whose independent registered advisory clears through Raymond James, said that for him, the notes may not be worth the cost.

"We have access to the strategy in house, and they make it internally inexpensive for us to do it," he said.

ETF alternative

"In addition, every investor can buy an exchange-traded fund that gives them access to Raymond James' picks," he noted, citing the Guggenheim Raymond James SB-1 Equity ETF, which trades on the NYSE Arca under the symbol "RYJ."

The SB-1 Equity index is composed of all equity securities rated Strong Buy 1 ("SB-1") by Raymond James & Associates.

The ETF has an expense ratio of 75 basis points.

"If I had seen it, and I haven't, I don't think I would have looked into this note. It's an interesting strategy, but the cost is an issue. Why would I pay 3% for a note when I can just buy an ETF?" Kunhardt said.

No optionality

Michael Kalscheur, financial adviser at Castle Wealth Advisors, said that he understood why one would want to be exposed to a basket representing the best picks of Raymond James. But he did not see why investors should use this format given the liquidity risk and the costs associated with the note.

"I can see that the notes give you access to their equity picks, and that's a one-stop shop," he said.

"But it's a note, and while Bank of Montreal has a good credit rating, you're still taking on the issuer's credit risk and you're locked in for a year.

"I don't see any risk compensation for having your money tied up for a year. This note offers no downside protection, no upside coupon, no upside leverage.

"And it's expensive: 3% is extremely high for a one year.

"I'm very surprised that they were able to sell $90 million of this."

Do it yourself

Kalscheur said that recreating the basket was an easy alternative, one that was not impossible for a small investor.

He assumed an investor would have $8,000 to invest.

Each purchase or sale of a stock, Kalscheur said, would cost him online $8.95.

For both orders and for the 13 securities, the total cost of the basket would be $132.70.

Using the 3% cost figure to calculate a break-even amount, Kalscheur said that starting at $7,756.66, an investor would be better off buying the stocks himself than investing in the notes.

"If you only have $1,000 to invest, then of course you couldn't physically buy the 13 different stocks," he said.

"But say you have $8,000, you want to make your IRA contribution and you have your heart set on these 13 stocks. You'd be better off buying them yourself.

"Why would you purchase these 13 stocks inside this note wrapper, which is increasing your risk, decreasing your liquidity and increasing your expenses?

"I would have taken a big pass on this one."

The equally weighted basket includes the common stocks of BB&T Corp., BMC Software, Inc., Brinker International, Inc., Chevron Corp., Lincoln National Corp., Nuance Communications, Inc., Nvidia Corp., Post Properties, Inc., Stanley Black & Decker Inc., Superior Energy Services, Inc., tw telecom inc., VeriFone Systems, Inc. and Whiting Petroleum Corp.

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