Barclays links to best of three baskets; cheap way to access global equities, adviser says

By Kenneth Lim

Boston, July 6 - Barclays Bank plc's notes linked to the best of three equity baskets is a simple product that allows investors to benefit from an optimally allocated portfolio, an investment adviser said.

Barclays plans to price medium-term notes due July 25, 2012 linked to the best performing among three baskets of the same components.

The first basket will have a 50% weight of the SPDR Trust, series 1, and 25% weights of the iShares MSCI EAFE index fund and the iShares MSCI Emerging Markets index fund. The second basket will have a 50% weight of the iShares MSCI EAFE index and 25% weights of the SPDR Trust, series 1, and iShares MSCI Emerging Markets index fund. The third basket will have a 50% weight of the iShares MSCI Emerging Markets index fund and 25% weights of the SPDR Trust, series 1, and iShares MSCI EAFE index fund.

The payout at maturity will be the return of the best-performing basket. Investors will share in any losses.

Equity alternative

The product should be seen as an alternative to a global equity portfolio because of the basket components as well as the risk-return profile, the adviser added.

"I would compare it to an equity portfolio with similar exposure to the three indices, which is to say having exposure to the U.S. equity markets, the EAFE equity markets and emerging markets," the adviser said.

"On the downside your exposure to those indices is the same as owning the stocks in those indices, on the upside your exposure is also almost the same. You also have credit exposure to Barclays on the downside."

What investors get out of the product is an optimal allocation among the three equity sectors, the adviser said. Investors just have to expect global equity markets on the whole to be better in three years.

"You're hoping that if emerging stock markets don't do well, maybe they're lower, but U.S. stock markets do well and the EAFE stock markets also do well, then this product will automatically underweight the emerging sector," the adviser said. "But you want equities overall to do better."

The best-of structure could also be a cheap option for investors, the adviser said.

"A retail investor who wants to figure out the best allocation could hazard an educated guess or look for a fund manager, but fund managers don't come cheap," the adviser said. "With this product, it's a little like saying you don't need to figure out the right allocation, we'll just give you the best possible combination."

Fair returns

The uncapped participation on the upside is a positive in a product that will be viewed as an alternative to a direct investment in the underlying assets, the adviser said.

"It means I won't underperform," the adviser said.

The lack of downside protection and the exposure to the issuer's credit risk may give some investors pause.

"There's no principal protection or any kind of downside protection, so I'm fully exposed if equities don't do well," the adviser said. "Credit risk, it's something the market's now very aware of, and I think a good number of investors at this point are still uncomfortable with that risk."

But perhaps investors should not expect too much, the adviser added.

"You can't have you cake and eat it too," the adviser said. "If you want to get the best of and you want a delta-one participation on the upside, you can't expect to get a lot of protection on the downside."

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