BofA’s Accelerated Return Notes tied to Nikkei index offer short-term, bullish bet on Japan

By Emma Trincal

New York, May 10 – BofA Finance LLC’s 0% Accelerated Return Notes due July 2019 linked to the Nikkei Stock Average index give investors short-term and highly levered exposure to the Japanese equity market.

The tradeoff however is no downside protection – making the notes bullish by default – and a capped upside, limiting their appeal to only mildly bullish investors, noted advisers.

The payout at maturity will be par of $10 plus triple any index gain, subject to a maximum return of par plus 16% to 20%, according to a 424B2 filed with the Securities and Exchange Commission.

The exact cap will be set at pricing.

Investors will lose 1% for each 1% decline.

Know thy asset

“It comes down to the index. What’s your view? I’d have to do my due diligence,” said Steve Doucette, financial adviser at Proctor Financial.

“Just from the chart, though, it looks like the Nikkei has been lagging the U.S. market for a little while. It was well above the S&P in 2015, and then it declined in 2016 and 2017. It’s still underperforming the S&P right now,” he said.

The S&P 500 index is down 0.5% on the year. The Nikkei has lost 4.3% during that time.

“It had a big drop. Assuming you find reasons to be hopeful on the Japanese economy...again, I would have to do my research... you may want to do a contrarian bet on it.”

The Nikkei Stock Average index, also known as the Nikki 225 index, measures the performance of 225 actively traded stocks listed on the Tokyo Stock Exchange.

One drawback for Doucette was the underlying.

“I’m not comfortable doing these single-country indices. We prefer to look at broad-based indices,” he said.

No buffer

Even with a bullish conviction about Japan, which he is lacking, Doucette said he would avoid investing in a note with no buffer.

“If I thought their economy was strong enough, if I believed the Nikkei would do better, I may lower the leverage to get some downside protection,” he said.

“But because it’s still a short-term product, my protection is going to come at a steep cost.

“It seems like other markets like India for instance have more promising outlooks. I’m just not sure whether Japan is the right place to go.

“But regardless of the asset class, since you never know how things will turn, we prefer to get some downside protection. And this one doesn’t have any.”

Low expectations

The notes are designed for investors who anticipate a moderate increase in the underlying index, as stated in the prospectus. With three times the index gain, investors may expect a 15.25% annualized compounded return with a rise in the index of only 5.12% a year.

Any index appreciation above that level would be “lost” for investors as those would be “capped out.”

Matt Medeiros, president and chief executive of the Institute for Wealth Management, made that observation noticing the capping effect of the high leverage.

Cap

“While the maximum return seems decent, you’re being capped quickly with only a small gain in the index,” he said.

“I’m positive on Japan. I think their economy should do well over the next couple of years.

“The government policies are very pro-growth. Economic growth is healthier.”

But Medeiros did not like the upside payout.

“I think the leverage has limited impact given the cap.

“We are bullish on Japan. We actually like international, emerging markets and Japan.

“I’d rather own the index long, without a cap.

“If I wanted to use a note, the cap would have to be higher relative to my baseline expectations.”

The notes are guaranteed by Bank of America Corp.

BofA Merrill Lynch will be the agent.

The notes are expected to price in May and settle in June.

The fee is 2%.

© 2015 Prospect News.
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