Goldman Sachs' leveraged buffered notes tied to MSCI EAFE offer good terms, risky underlying

By Emma Trincal

New York, July 21 - Goldman Sachs Group, Inc.'s planned 0% leveraged buffered notes tied to the MSCI EAFE index have an attractive payout, but some investors said that they find the underlying index much less attractive.

The maturity date is expected to be 18 months after issue, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par plus double any index gain, subject to a maximum return of 18.5% to 21.5%. Investors will receive par if the index declines by 15% or less and will lose 1% for every 1% that it declines beyond 15%.

The MSCI EAFE is a stock market index designed to track the performance of developed markets in Europe, Australia, some Asian countries and the Far East. It excludes the United States and Canada.

Japan has a weighting of 23%. European countries, including the United Kingdom, Germany, France, Greece, Spain and others, represent a total allocation of nearly 60%.

'Strange bird'

"The EAFE is a strange bird. Most people who invest in Asia want Asia ex-Japan and they want to be invested in China," said Peter Rup, chief investment officer at Artemis Wealth Advisors. "It has a lot of European exposure, and I don't predict these markets will grow as rapid a pace as the U.S."

Reasonable returns

The underlying index would only have to go up by approximately 6% to 7% per year for investors to maximize their gains, based on the leverage factor of two and the cap range of 18.5% to 21.5%.

"I am reasonably bullish, and I fail to understand why anyone would be interested in the EAFE. But if you have to get this exposure, the return objective of the product is entirely reasonable," Rup said.

The iShares MSCI EAFE index fund, which tracks the MSCI EAFE index, has already suffered a steep decline over the past three months, Rup noted. It is down more than 15% since mid-April.

"It has declined because of the European debt crisis," he said.

Since the selloff has already been significant, Rup said that a 6% to 7% annual gain over the next 18 months is "doable."

U.S. is better

Rup said that he is less concerned with the downside risk than with the possibility of missing better opportunities by "getting locked in" for 18 months with relatively limited upside potential.

"I don't believe you're going to see an 18% decline in the EAFE over the next 18 months," he said.

"But as a buy-and-hold investor, I believe the U.S. market will pay off much better than this product."

No conviction

Kirk Chisholm, principal and wealth manager at NUA Advisors, agreed, saying that the investment could make sense for moderately bullish investors who would want to use the leverage to enhance their returns.

But he said that he lacked the conviction to gain exposure to the developed equity markets, seeing deflation and sovereign debt problems as too risky to ignore.

"I am too bearish to consider this. I think developed markets still have a few rounds of deleveraging and deflation to go over the next few years," Chisholm said.

Chisholm more specifically said that he would "stay away from Europe," given the government debt crisis in the eurozone.

"I just don't think the index will be positive in 18 months," he said.

"But if I was required to allocate to these markets, then this product would be a better solution than a direct investment in the index. At least you do have some protection on the downside," he said.

Goldman, Sachs & Co. is the underwriter.

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