RBC, Barclays link notes to strategies; structured wrapper a best fit, strategy creator says

By Kenneth Lim

Boston, May 13 - Issuers this week launched structured notes linked to investment ideas that aim to replicate fund strategies.

Royal Bank of Canada plans to price zero-coupon direct investment notes due July 9, 2010 linked to the EquityCompass Equity Risk Management Strategy

The strategy seeks to offer exposure to U.S. large-cap stocks while reducing the downside risk of such an investment and uses a set of rules to construct a theoretical portfolio of different combinations of cash and/or a long or short position in the S&P 500 Total Return index.

The portfolio is reallocated monthly based on the average of a directional earnings model that reflects earnings-per-share estimate changes of index components and on a technical model that compares recent levels of the Dow Jones Industrial Average to its all-time high and the lowest level after that all-time high.

RBC will reduce the value of the portfolio by 0.15% each time it is reallocated.

The payout at maturity will be par plus 98.1% of the portfolio performance. If the portfolio performance is less than or equal to negative 50% on any day during the life of the notes, the notes will be called and investors will receive par plus 98.1% of the portfolio performance.

The portfolio performance on the first trading day following the call trigger date will be used to calculate the payout.

Efficient wrapper

The RBC notes were created to allow the EquityCompass strategy to be sold in an efficient wrapper in terms of tax treatment and liquidity, EquityCompass chief investment officer Richard E. Cripps said.

"It was a best fit," Cripps said. "We're marketing it not so much as a product as a strategy. The structured note seemed to offer the best approach than most."

Coming out with a new equity-based product amid the recent market uncertainties was a concern for EquityCompass, which held off on launching the product earlier, Cripps said.

"We did not want to bring this product to the market in March when investors were incredibly defensive because they would have been buying last year's performance, and we know that that would have been bad," he said.

"Investors would have been buying it solely on what it did last year, so we wanted the market to have a rally. This would be a better time to consider using this strategy. The increase in the market over the last eight or nine weeks has created the scenario where we wanted to offer this product."

The underlying strategy could be interesting to investors who want a dynamic portfolio that can adapt to different markets, Cripps said.

"The issue right now with investors is they're fearful of another bear market," he said. "They're risk averse. They want a strategy that in some way will react and protect that value. It also gives them the flexibility or adaptability to be long when the market's going up. So we almost view it as a bridge for investors who are very risk averse, to tentatively look at the stock market."

Initial response has been heartening, he said.

"So far it's been pretty good," Cripps said. "So far we've been a little surprised...There seems to be interest in it, and we think we're encouraged, and for financial advisers who are using the product it's part of the constructive conversation with the clients, and for the past year we have not had constructive conversations."

Barclays launches ETF notes

Barclays Bank plc also plans to price zero-coupon Perpetual Rolling Open Structure Protecting Equity Returns (Prosper) ETF notes due 2014 linked to the Barclays Prosper ETF portfolio.

The portfolio is a notional portfolio that adjusts its allocations between index-linked cash deposits and a basket of eight exchange-traded funds - the iShares Russell 1000, iShares S&P MidCap 400 Index, iShares Russell 2000 Index, iShares MSCI EAFE Index, iShares MSCI Emerging Markets Index, SPDR Dow Jones REIT, PowerShares DB Commodity Index Tracking and iShares Barclays Aggregate Bond funds. The portfolio will aim to keep its "gap risk factor," which measures the extent to which the basket can decline before it falls to a minimum protection level, as close as possible to 23.6% by overweighting the basket when the gap risk factor is low and underweighting the basket when the gap risk factor is high.

The initial portfolio allocation will be 64% in the basket of ETFs and 36% in cash assets.

At maturity, the Barclays notes will pay the higher of the portfolio's NAV and a minimum protection level of 85% of the highest portfolio NAV level during the life of the notes. There is an annual fee of 1.75% of the NAV.

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