Barclays’ $3.55 million daily autocallable bearish notes on S&P to help diversify, allocate

By Emma Trincal

New York, Sept. 19 – Barclays Bank plc’s $3.55 million 0% daily autocallable bearish notes due Aug. 18, 2021 based on the S&P 500 index offer more than a bearish play on the market, according to buysiders who saw other possible uses of the notes in a portfolio such as equity replacement and diversification.

The notes will be automatically called at par if, on any day during the life of the notes, the closing level of the underlier is less than the barrier value, which is 75% of the initial level, according to a 424B2 filed with the Securities and Exchange Commission.

If the final index level is greater than or equal to the initial level, the payout will be par plus 2%.

If the final index level is less than the initial level, the payout will be par plus the absolute value of the return of the index.

Equity allocation

Steve Doucette, financial adviser at Proctor Financial, said he would use the notes as an equity replacement.

“I kind of like this note, especially if we’re going into a bear market,” he said.

Naturally, the risk would be to face a severe bear market causing the index to breach the barrier level at some point during the term. In such scenario, the notes would be called and investors would receive 100% of their principal back. But there would be no gain.

For Doucette, such “risk” was worth taking.

For one thing, the call could be triggered any time, which includes early on. The duration of the notes could be extremely short as a result, reducing the opportunity cost of not making any money during the holding period.

But Doucette’s main argument was that of an asset allocator.

Beating the benchmark

“If this is used as an equity replacement and the index drops, say 26%, I get my money back. You could argue that I make nothing. But I also lose nothing. This thing is part of my equity allocation. That’s how I have to look at it. So in relation to my benchmark I actually outperformed the market by 26 points,” he said.

“You have to look at it from an asset allocation standpoint.

“In the meantime, the absolute return feature is really nice...If the market is down 20%, you make 20%; you have a 40% spread. You are massively outperforming the index.”

Since principal is protected against market risk, the notes could also be used in part in the fixed-income bucket.

“I may take a little bit of it as a hedge against a market downturn and use a little bit of it in fixed-income.

“If it’s up, I’m only making 1% a year. But rates are so low...what am I really giving up on the fixed-income side? The two-year Treasury is 1.5%.

“This is definitely better than putting money in the bank because you have the potential for equity-like returns.”

Not for hedging

Jeff Pietsch, head of capital markets at the Institute for Wealth Management, also saw the notes fitting in a portfolio.

“It’s an interesting deal,” he said.

“I would hate to see somebody using it because they’re bearish. They’re better ways to play that, and the risk of getting called and getting nothing is high.”

For Pietsch, the notes may satisfy a need to diversify and hedge against interest rate risk in an uncertain environment.

Cautious on bonds

“I could see this note used by someone who is bearish on bonds with yields at generational lows,” he said.

Investors who need to diversify their equity exposure across other asset classes but are reluctant to buy bonds could benefit from the trade.

“This could be a diversifier in an overall portfolio if you don’t want to hold bonds, if you’re bearish on bonds and you can get this instead, something that’s not correlated to stocks.”

The risk associated with bond investing is sometimes overlooked, according to this adviser.

The recent performance of the iShares 20+ year Treasury bond exchange-traded fund, which offers exposure to long-term Treasury bonds, illustrates the point, he said.

In August, the fund rose by 10.8%. This month, it is down nearly 5%, he noted.

“There’s quite a bit of volatility that’s emblematic of what bond investors have to deal with. Rate volatility compounded with rates being so low make bonds relatively risky right now.

“This vehicle might be a way to moderate or even eliminate that rate risk while remaining inversely correlated to stocks to a degree.”

Trade-off

Pietsch examined the worst outcome: the notes are automatically called if the market turns really bearish. Investors do not get any return.

“The 25% range is not that wide. At the end of last year, the market was down 19%. Another few bad days and you could hit the 25% point.

“You would be called away. The risk of getting nothing is out there.

“But it’s a small concern compared to the benefit of being able to diversify your portfolio without having the exposure to interest rate risk.”

Barclays is the underwriter, with J.P. Morgan Securities LLC and JPMorgan Chase Bank, NA as placement agents.

The notes settled on Wednesday.

The fee is 0%.

The Cusip is 06747NGH1.

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