Barclays’ 18-month buffered SuperTrack notes tied to S&P 500 show high chances of modest gains

By Emma Trincal

New York, March 17 – Barclays Bank plc’s 0% buffered SuperTrack notes due Sept. 20, 2018 linked to the S&P 500 index give investors a high probability of securing a modest gain, making the notes potentially attractive to investors seeking less risk or expecting subdued returns, said Tim Mortimer, managing director at Future Value Consultants.

The payout at maturity will be par plus 1.5 times any index gain, up to a maximum return of 10.75%, 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% for each 1% that the index may decline beyond 10%.

Future Value Consultants runs stress-test reports for its clients that are designed to assess the probabilities of return outcomes in various scenarios corresponding to different market conditions.

The reports include both forward-looking predictions and backtesting results for the past five, 10 and 15 years, he explained.

Aside from losses and gains, Future Value runs other tests, which are specific to each product. Such tests may be probabilities of barrier breach, probabilities of call at various dates for autocallable notes.

For this product, the tests will focus on the probabilities of reaching the caps.

Specific tests

The product-specific test table showed that investors in a neutral scenario have a 40% chance of getting the maximum return, according to the stress-test report for this note. This outcome would be the 10.75% cap. On a compounded annualized basis, the maximum return is 7.05%.

“It’s not a very high return. But you have a pretty good chance of getting it,” said Mortimer.

In a bull market, the probability of achieving the maximum return increased to 57%. As expected, it declined to 24% in a bear scenario.

The backtesting result over the past five years showed that the probability of reaching the maximum gain is much higher than in the base-case scenario, at 72%.

“This probability is high because the past five years have not been anything but a bull market,” he said.

But if one goes back further in time, the odds of maximizing gains remained high as well, he added.

Despite going through the crash of 2007-2008, the past 10 years and 15 years have seen probabilities of “capping out” at 60% in each case, according to the report.

“This product has achieved its best return quite frequently,” he said.

Scorecard

Using the model’s investor scorecard, Mortimer interpreted the probabilities of different outcomes of product performance. One of the scorecards is the base-case scenario while the others are backtested reports for the past five, 10 and 15 year.

As observed previously, the probability of getting the maximum return is 40%. The chances of getting a positive return below the cap are only 17%. Overall, investors have a 57% chance of making money from the notes.

Getting a positive return below and above the cap are two distinct outcomes, he said.

“In our scorecard, all outcomes are mutually exclusive. They can’t overlap.”

The result only means that investors have more than twice the chance of hitting the cap than being below the cap.

This is due in part to the modest index performance required to maximize returns. As long as the S&P 500 index rises by 4.72% a year, investors will be able to reach the cap.

In terms of losses, the scorecard showed a 25% chance of losing capital.

“This obviously cannot be ignored. If you look at the scorecard for the past five years however, this probability becomes zero. It’s not surprising given the strong uptrend in the market and also the fact that you have a 10% buffer.

“But you still need to remember that 25% can be expected.”

Capital performance

The capital-performance test table shows the probability of three outcomes – return more than capital, return exactly capital, return less than capital – and the average payoff associated with each.

The average payoff in the “return more than capital” will be 109.2%.

“Any payoff on average will get you 109.2%. Most of the time, you’ll get the 107.5% cap but in other times, specifically 17% of the time...you’ll be getting a smaller return. That averages out to 109.2%,” he said.

The payoff outcome in case of losses is 82.6%.

“That’s your average return if you lose some principal. Not surprisingly, the bear scenario showed greater losses with an average return of capital of 78.9%. That’s a 3% additional average loss.”

The backtested results for this capital performance tests table showed that over the last five years investors received a positive return 96% of the time. The average payout for this outcome was 109.6%. The payout figure is almost identical to the projected average of 109.7% in a bull market shown in the prior capital performance table.

“The last five years were similar to a bull scenario. Those two payoff averages are nearly the same,” he said.

“This note gives you a relatively modest maximum return but with high chances of achieving that. The 10% buffer over 18 months reduces the chances of losing money to only 25%. Your ambition for gains has to be relatively limited however. At the same time, the risk is lower, which may appeal to conservative investors.”

Barclays is the agent.

The notes will price on March 17 and settle on March 22.

The Cusip number is 06741VNV0.

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