Barclays' Super Track notes tied to S&P 500 offer attractive upside, protection, sources say

By Emma Trincal

New York, Nov. 1 - Barclays Bank plc's 0% Super Track notes due Feb. 3, 2014 linked to the S&P 500 index caught some advisers' attention for a relatively attractive cap combined with a buffer in a 15-month duration.

The payout at maturity will be par plus double any index gain, up to a maximum return of 14.9%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 10% and will lose 1.1111% for each 1% decline beyond 10%.

"If we were looking for S&P exposure, this may make sense. It's a nicely packaged note with some upside and a 10% buffer," said Steve Doucette, financial adviser at Proctor Financial.

While the terms are attractive, the investment is not recommended for all clients, he said. Very bullish investors, for instance, would not benefit from it due to the cap, he noted.

Different views, caps

"It depends on what you think the direction of the underlying is going to be," he said.

"You do have a cap, and not everyone wants a cap or this cap."

The 14.9% maximum return associated with the 15-month product is the equivalent of nearly 12% a year.

"I think 12% is reasonable if we need S&P exposure," said Doucette. "Nobody is going to complain about 12% a year. And yet, people will complain if the market is up 24%."

"You really have to ask yourself if you expect the market to grow by more than 12% a year. If you do, you need a higher cap," he said.

The solution, Doucette added, is to avoid one-size-fits-all investments.

"I think you need to have several scenarios in place, and that's why we are asset allocators," he said.

"I may put 5% of my allocation to this but I would also allocate to more bullish products, for instance a 1.5 times or 1.2 times upside leverage with no cap.

"That piece would be put in there among other things."

"These structured notes are not all-or-nothing vehicles. So theoretically, yes, I like it, but only as a small bucket in my overall asset allocation," he said.

Short term

Matt Medeiros, president and chief executive officer of the Institute for Wealth Management, said he liked the tenor and the underlying.

"I like large caps; I like the S&P," he said.

"The fact that it's short-term in nature is very helpful in these circumstances because of the impending challenges we have to work through. You want to have an idea of what the return related to the risk is going to be. I think we have a decent grasp of these issues within 15 months."

Medeiros said that he expects the growth potential of the S&P 500 on an annualized basis to be in the highest single-digit.

"To amplify this with the leverage looks very interesting," he said.

"Over the next 15 months, with some of the potential volatility we'll be facing, having a 10% buffer on the downside gives more opportunity to stay invested for the period as opposed to being long the index or trying to time the index."

"I like it," he said.

While a buffer with some downside leverage is less attractive than a buffer without, sources said that the downside protection in the notes was still better than an equivalent 90% barrier.

For instance, if the S&P 500 index finished 20% below its initial level, investors in the notes would lose 11.11% versus 20% with a 90% barrier.

That's because the 1.1111% downside leverage factor on the downside only applies to every 1% loss below the buffer, not below the initial price.

Low fee eyed

One aspect of the product both buysiders appreciated was the low fee of 0.05% of the principal amount, or $0.50 per $1,000 principal amount, according to the prospectus.

"It must be for the [Registered Investment Advisor] community. We buy at institutional level. Were not getting profit on the product but we charge our clients a fee. So we don't have the same conflicts as the brokers who often push the product for the commission. We're just trying to get the lowest cost product. And this one is pretty low cost," Doucette said.

"The fact that Barclays is charging such a low fee is also attractive for a pure S&P play with a buffer and a little kick on the return," Medeiros said.

Barclays is the agent.

The Cusip number is 06741TJV0.

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