Deutsche Bank links to five alpha indexes; one-stop cross-asset product could appeal to retail, advisor says

By Kenneth Lim

Boston, Aug. 18 - Deutsche Bank AG's planned leveraged notes linked to five of its proprietary alpha investment indexes will likely appeal more to retail investors and commissioned advisors, a fee-only investment advisor said.

Deutsche Bank plans to offer zero-coupon leveraged upside securities due Sept. 29, 2011 linked to the Deutsche Bank Liquid Alpha USD 5 Total Return index.

If the final index level is at least the initial level, the payout at maturity will be par plus 180% to 200% of any gain. The exact participation rate will be set at pricing. Otherwise, the payout will be par times the index performance.

The index was designed to reflect the combined total return performance of five Deutsche Bank indexes in equity, rates, commodities, foreign exchange and cash. The component indexes are the S&P X-Alpha USD Total Return Strategy in equity, the Commodity Harvest USD Total Return in commodities, the Balanced Currency Harvest (USD-Funded) in foreign exchange, the Smart USD in rates and the Fed Funds Total Return in cash.

The index constituents and their weights are selected by the index sponsor to identify a notional portfolio that would have given the best return over the previous 60 business days at a predetermined volatility.

Notes offer alpha potential

The investment advisor said the notes offered investors a simple way to invest in a broad range of alpha investment strategies.

"They're offering kind of a one-stop shop for investors who are looking for better-than-market returns," the advisor said. "Each one of the notes is like a mini portfolio with exposure in five different asset classes, so you don't have to buy five different products."

Alpha strategies tend to be more attractive when underlying markets are weak or going through some uncertainty, the advisor said.

"When investors can't make money on the main indices, the S&P 500s, the tendency is to look for investments that offer the promise of absolute returns," the advisor said. "When the markets are good, anybody can make a profit. When the markets are bad, those who don't know how to do it will look for people who know how to do it to help them make their investment decisions. So products like these, managed funds, alpha indexes, they become more attractive."

The index underlying Deutsche Bank's notes will also be adjusted for a predetermined volatility, which is a positive feature for investors, the advisor said.

"Two things come to mind when I see that," the advisor said. "The first is that it probably makes it easier for the bank to price this product, so it may allow them to offer better terms for investors. The second point is that a stable underlying volatility is also positive for investors because you know what kind of risk you're getting with this product regardless of the volatility of the individual components of the index. That's quite significant in this case because the volatility for each of the components of this index is quite different from one another, because they're in different asset classes, so knowing that the index has a fixed volatility makes a difference."

Product holds retail appeal

The Deutsche Bank product will likely appeal to retail investors who want a simple way to enhance the yields of their portfolios, the advisor said.

"It's a relatively short-medium-term product, so the retail investor who basically just wants to tide over today's markets will be comfortable putting money into this," the advisor said. "It's also a pretty broad-based index, so it's kind of 'buy one get five' for the retail investors who maybe aren't so comfortable about picking one asset class over another."

Commissioned advisors may contribute a significant portion of the market for the notes, the advisor said.

"Obviously guys who are working for Deutsche and those whose firms help to distribute products from Deutsche will be a big part of their marketing efforts," the advisor said.

But not all fee-based advisors may like the product, the advisor said.

"If you're cynical, you might say that the fee-only guys don't like stuff like these because it could take business away from them," the advisor said. "You buy this, which pretty much gives you a portfolio, and it's actually a dynamic portfolio, for about two years, so you don't get business from that client for about two years.

"But I think the issue is that our value-add is giving clients our expertise, and in a product like this it's actually a little hard for us to know exactly what kind of exposure each investment dollar is going to get and how much risk is involved. So if there's that uncertainty, I may be a little reluctant to recommend it to clients. I could still recommend it, but I'll have to explain why I think it's good and explain the risks and the uncertainties."

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