Bank of Montreal’s upside booster notes offer substitute for long position in Euro Stoxx 50

By Emma Trincal

New York, Nov. 9 – Bank of Montreal’s 0% upside booster notes with barrier due Nov. 30, 2018 linked to the Euro Stoxx 50 index offer an attractive alternative to the index, sources said.

If the index gains by more than the 17% booster, the payout at maturity will be par plus the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the index gains by up to 17% or falls by up to 10%, the payout will be par plus 17%.

If the index finishes below the 90% barrier level, investors will be fully exposed to the decline.

Index substitute

“If I was just going to buy the index, I would take this instead,” said Scott Cramer, president of Cramer & Rauchegger, Inc.

“This is essentially buying the index except that if it stays between minus 10% and plus 17%, you’re going to come up better.

“If you’re talking to clients who are looking to mitigate the downside or find an alternative to a fixed-return instrument or CD, this is not for them.”

Barrier

The structured note has to be used as a “piece of the portfolio construction,” he said.

“For someone who has a longer-term outlook and believes in the Euro Stoxx, this would be a good play in the event that the index stays relatively flat, which I don’t think will be the case. I think we’ll see some volatility.

“However, the barrier is observed at the end, not during the life of the notes. It’s much more attractive because no matter what happens during the three years, it’s the final level that counts only.”

The notes make for a good alternative to the index itself.

“You don’t limit the upside. You limit the downside. And you get a potential increase if it falls within the minus 10% to plus 17% range,” he said.

Euro is a must

Carl Kunhardt, wealth adviser at Quest Capital Management, sees the notes as an even better alternative than an equivalent long-only investment in the equity.

“The Euro Stoxx is basically the Dow in Europe. It’s part of an international allocation everyone needs to have,” he said.

“Whether you like it or not, Europe is going to be a cornerstone of your non-U.S. holdings. You’re going to have the allocation almost regardless of the market.”

He explained that some recent academic studies recommend allocating up to 15% to 20% to international stocks.

“If you’re going to invest in equities outside the U.S. and Canada, Europe is going to form a good core of your assets.

“There are other developed markets asides from the U.S., Canada and Europe, but they’re not as dominant. Australia is not the largest economy in the world. Japan has issues.

“And emerging markets are small allocations.

“We have 15% to 20% in non-U.S. developed countries, and we rarely go over 5% in emerging markets. That’s typical among financial planners. So what’s left? By default the most prevalent asset class in your international portfolio is going to be Europe.”

Excess return

From that premise, any financial adviser will have to allocate funds to European equity and therefore be long the Euro Stoxx 50 index, he said.

“I’m exposed to that part of the world. I hold the position long. I hold the upside. I hold the downside,” he noted.

“If I’m down 20%, I’m down 20%. If I’m down 10%, I’m down 10%. If I’m up 3%, I’m up 3%. And if I’m up 25%, I’m up 25%.

“Now what happens with the notes? I’m down 20%, I’m down 20%. I’m down 10%, I’m up 17%. I’m up 3%, I’m up 17%. I’m up 25%, I get 25%.

“You just caught my attention.”

Competitive terms

He also said that the commission of 1.2% cited in the prospectus is very reasonable.

“If that’s the only upfront cost there is, this deal is a no-brainer,” he said.

“You’re down 8%, you get 17%. With the fee you’re up 16%

“We’re not having a debate over that.”

Kunhardt said he even wondered how the issuer had been able to price the terms, which he found very competitive.

“It’s perhaps the size of the barrier. Ten percent is not that big on a three-year. I’m sure you can see 75% or 80% barriers out there.

“But even a note with an 80% barrier ... all you get is par, not a positive return.”

He also compared the structure to an absolute return note, saying that this product is superior.

With an absolute return structure, any index price decline between the barrier threshold and the initial price would offer a one-to-one inverse participation in the decline.

“This is even better because the booster is a fixed return. So it doesn’t matter if you’re down only 1%. You’re not going to get a 1% gain. You’re going to get 17%.

“This booster can significantly enhance your return.

“I don’t know why you wouldn’t use this note.”

BMO Capital Markets Corp. is the agent.

The notes will price Nov. 24 and settle Nov. 30.

The Cusip number is 06366R4C6.

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