Barclays' Super Track notes linked to iShares MSCI Brazil fund are for growth, diversification

By Emma Trincal

New York, March 12 - Barclays' leveraged notes linked to the iShares MSCI Brazil index fund may appeal to mildly bullish investors willing to take some risk and eager to play Brazil as a growth story or as a diversification tool, said Tim Mortimer, structured products analyst at Future Value Consultants.

Barclays Bank plc plans to price zero-coupon Super Track notes due April 29, 2011 based on the iShares MSCI Brazil index fund, according to an FWP filing with the Securities and Exchange Commission.

The payout at maturity will be par plus triple any fund gain, up to a maximum return of 25.2% to 28.9%. The exact cap will be set at pricing.

Investors will be exposed to any losses.

Growth and diversification

Mortimer said that the iShares MSCI series tend to be the most common funds used to give investors access to exotic markets.

"This is a product brought by demand," said Mortimer.

"Investors have the desire to invest in a specific geographic sector. They have a view and believe that Brazil is a strong story; or they seek a small percentage exposure to a lot of different things and they use it for diversification purposes," he said.

Mildly bullish

Mortimer said that the product has the potential to attract mildly bullish investors because it only takes approximately 8.5% in annual growth of the underlying to get the best result.

The index doubled last year but is down by 1.82% year to date.

"With the 300% participation rate, you don't really need much growth to get the full return," said Mortimer. "Depending on what the cap will be, all it takes is between 8.4% to 9.63% annual return to achieve the maximum return on the product. In that case, you're hitting the cap level and you're getting the best possible result."

No buffer

On the downside though, the notes involve substantial risk, said Mortimer, citing two main factors - the lack of a buffer and the volatility of the underlying.

"You have no buffer, so you're taking full downside risk, plus Barclays' credit risk. If the fund performs badly, this product will perform badly as well," Mortimer said.

Riskmap for the product is 7.77.

Riskmap is a Future Value Consultants' rating that measures the risk associated with a product on a scale from zero to 10.

Volatile underlying

As evidenced by one of the report's charts showing that riskmap is far on the right side of the rating versus the riskmap chart, Mortimer said that the product was "high risk."

The annualized volatility of the iShares MSCI Brazil index fund is 51.18%. "This is quite high," Mortimer said. As a comparison, the historical volatility of the S&P 500 index is between 25% and 35%, he said.

While a single stock's volatility can be 70% or higher, the Brazil index fund is "in the middle of the range," said Mortimer.

The high level of risk is reflected by the probability tables of the product return outcomes.

"The probabilities of maximum losses are in the same range as the probabilities of gains," noted Mortimer.

According to Future Value Consultants' research, investors have 44.1% chances of losing 5% or more of their principal. But the probability of making more than 15% is 48.1%.

The return rating for the notes is 4.59.

Return rating is Future Value Consultants' indicator, on a scale of zero to 10, of the risk-adjusted return of the notes. It is calculated from Monte Carlo simulations.

"This return rating has been pushed down by the heavy chances of losing capital. Our ratings are supposed to be neutral in comparing risk and reward," said Mortimer.

"With that type of underlying, you would expect to see a buffer. The absence of any downside protection is what allows you have a high cap," said Mortimer.

Not bad overall

The overall rating for the notes is 6.09. This score on a scale of zero to 10, is Future Value Consultants' opinion on the quality of a deal.

"It's not that low compared to the other products we rate. We analyze 700 products a year," said Mortimer.

On the rating versus riskmap chart, which gives dispersions of ratings and riskmap for the last 80 products rated by Future Value Consultants, this product is among the top two-thirds, said Mortimer.

The notes will price on March 26 and settle on March 31.

Barclays Capital Inc. is the agent.

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