JPMorgan's notes tied to mining, energy stocks should appeal to sector investors, adviser says

By Emma Trincal

New York, Nov. 22 - JPMorgan Chase & Co.'s planned notes linked to a basket of eight stocks offer a targeted exposure to natural resources stocks for investors eager to invest in this sector and an alternative to an exchange-traded fund, a financial adviser said.

"This is created as a pseudo-ETF for investors who want to invest solely in mining and energy stocks. I think it makes sense," said Carl Kunhardt, director of investment management and research at Quest Capital Management.

JPMorgan Chase plans to price 0% return notes due Dec. 7, 2011 linked to a basket of common stocks, according to an FWP filing with the Securities and Exchange Commission.

The equally weighted basket includes Agrium Inc., Cliffs Natural Resources Inc., Chevron Corp., Freeport-McMoRan Copper & Gold Inc., Marathon Oil Corp., Newmont Mining Corp., Thompson Creek Metals Co. Inc. and Vale SA.

Marathon and Chevron are oil and natural gas companies; Agrium is a Canadian supplier of agricultural products; and the other firms are metals and mining companies.

One of the risks underlined by the issuer in the prospectus is the concentration of the stocks in the natural resources industry, a factor that reduces diversification and makes the basket potentially more volatile.

But some investors chase higher returns by making bets in some specific industries.

"If you want an over-bias in the mining and energy sectors, this wouldn't be a bad way of doing it," Kunhardt said.

Adjustment factor

The payout at maturity will be 99% of the sum of par plus the basket return. Investors will experience a loss if the basket return is less than 1.01%.

"Not having a 100% participation rate is not very attractive," said Suzi Hampson, structured products analyst at Future Value Consultants.

"I'm not sure what the advantage is. It looks like you could go out there and buy the stocks directly. The structure does not offer any buffer or any advantage, such as leverage," she said.

"It's weird that JPMorgan would be doing that. They don't usually do deals with a participation rate of less than 100%."

Sectors and cost

But for Kunhardt, the adjustment factor was only another way for the issuer to charge a justified fee for putting together a highly specialized portfolio.

"I don't really have an issue with that," he said.

"With this 1%, they're merely covering their expenses for a portfolio tailored to those two sectors.

"It's not really different from the 80 to 90 basis points, sometimes more than 1% fee you'd have to pay for a sector ETF.

"Anytime you deal with sector investing, your fee is going to go up."

The notes (Cusip 48124A3D7) are expected to price Tuesday and settle Nov. 29.

J.P. Morgan Securities LLC is the agent.

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