Barclays accelerated notes linked to real estate could be attractive to moderate bulls, adviser says

By Kenneth Lim

Boston, Sept. 7 - A series of accelerated participation notes linked to a real estate index fund could be an attractive alternative for investors who are modestly bullish about the domestic real estate market, a financial adviser said.

Barclays Bank plc plans to price 0% buffered Super Track notes due March 30, 2012 linked to the iShares Dow Jones U.S. Real Estate index fund, according to regulatory filing.

At maturity, the notes will pay par plus 1.5 times any gain in the fund, up to a maximum total return of 21% to 27%. The cap will be set at pricing.

Investors will receive par if the shares fall by 10% or less and will lose 1% for every 1% decline beyond 10%.

The notes (Cusip 06740PNM4) will price on Sept. 27 and settle on Sept. 30.

Barclays Capital Inc. is the agent.

Geared upside

The notes should be seen as an alternative to a direct investment in the fund, the adviser said.

"If you look at the potential volatility of the product and the potential risks and returns, I think what you'll see is that it's more equity-like than like a fixed-income asset," the adviser said. "You're basically buying a leveraged option on the underlying."

The 1.5-times participation on the upside means that investors can outperform a direct investment in the fund as long as the fund does not increase above the return cap over the next 18 months, the adviser said.

On the downside, the notes also offer a 10% buffer before investors begin to lose their principal, and investors will receive at least 10% of their principal back at maturity.

"From a risk perspective, they're better than owning the fund itself because you do have this buffer," the adviser said. "It's not a huge buffer, but it's better than nothing. At the very least you always outperform the notes if the fund goes down."

Modest bulls

Investors should buy the notes only if they are confident that the real estate market in the United States will improve over the next year and a half, the adviser said.

"I think that's the first test you have to pass," the adviser said. "If you wouldn't put money in the fund in the first place, then you shouldn't buy this product."

Investors should also believe that the return of the fund will not exceed the cap when the note matures, because in that case they might be better off investing directly, the adviser added.

"Some people will say, hey, I'm still getting 21% or 27%, wherever they set the cap, which isn't bad," the adviser said. "But you have to look at it in risk-adjusted terms. You're taking quite a bit of risk to have the potential to make that kind of return, so you have to think whether it's worth that risk."

The risk of the product exceeding the cap or ending below the buffer is also not trivial.

"The fund has doubled over the last 18 months, so if you're talking about seriously underperforming the fund, there's quite a significant risk there," the adviser said. "And if it can go up by more than 100% in 18 months, it can easily fall more than 10% in 18 months."

Buyers of the structured note should be expressing a moderately bullish view of the fund, the adviser said.

"If you think that the fund's going to go up by only a little by March 2012, then this might not be a bad investment," the adviser said. "You get a geared upside, a bit of protection on the downside, which isn't bad at all."

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