Barclays’ $4.95 million trigger PLUS on Russell 1000 Value offer play on value rotation theme

By Emma Trincal

New York, Oct. 21 – Barclays Bank plc’s $4.95 million of 0% trigger Performance Leveraged Upside Securities due Jan. 19, 2024 linked to the Russell 1000 Value index offer a compelling way to bet on the return of value investing as a top-performing strategy, advisers said.

If the index finishes above its initial level, the payout at maturity will be par of $10 plus 147% of the index return, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes at or below its initial level but at or above its trigger level, the payout will be par. The trigger level is 70% of the initial index level.

If the index finishes below its trigger level, investors will be exposed to the index’s decline from its initial level.

The Russell 1000 Value index measures the capitalization-weighted price performance of the stocks included in the Russell 1000 index that are determined by FTSE Russell to be value-oriented.

Trend reversal

“This is an interesting note, and I would consider it,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“It’s a play on the value rotation theme.

“Since 2009, growth and momentum have really taken off. We’ve expected a rotation. It hasn’t happened yet, but we’re getting there. Most advisers believe that we’re going to have a growth-to-value rotation and that value will be the new winner for an extended period of time.”

Kunhardt said that it was a rational expectation.

“It used to be ... if you looked at a 10-year period of time, growth and value would get pretty much to the same place with a few basis points’ difference,” he said.

“But growth has been outperforming since 2009, and there is a good reason to expect value to catch up for a significant time.”

One important difference between the two asset classes, he noted, is that growth stocks are “momentum-driven” whereas value stocks are more “price-driven,” which makes the class a little bit less volatile.

“Those value stocks have done better during last year’s correction,” he said.

“That could explain that they’re doing relatively better now if you look back a year from now and take into account the fourth-quarter pullback.

“If you believe in this shift from growth to value, and I certainly do, this note over four years is a good way to make that bet.”

Asset allocation, barrier

Kunhardt added that the note can be easily included in a portfolio. The underlying represents a segment of the Russell 1000 index, which tracks the top U.S. companies by market capitalization.

“It fits right into my asset allocation. This is a U.S. large-cap index. As an asset allocator, I’m always going to have U.S. large-cap in my portfolio,” he said.

Regarding the structure, the main advantage was the barrier.

“The leverage doesn’t give you anything, but it makes up for the loss of dividends,” he said.

The annual dividend yield on the underlying index is 2.4%.

“The real thing you’re getting is the barrier ... 30% of protection. Do I think that over four years the large-cap value index is going to be down 30%? No, I don’t,” he said.

“This is a defensive play on value with a barrier you’re unlikely to breach.

“I like the note.”

Less volatile

Jerry Verseput, president of Veripax Financial Management, agreed. He said the notes were a compelling investment for those who believe the pendulum will revert to value.

Part of the recent narrowing of the gap between value and growth has to do with the pullback in momentum stocks.

“Growth is essentially dominated” by stocks like Facebook, Inc. and Amazon.com, Inc., which have been “vulnerable lately,” he said.

At $189.76, Facebook’s share price is down 9% from its 52-week high.

Amazon’s price has declined by 12.2% from its 52-week high to $1,785.66.

The top five constituents of the underlying index are less volatile names: Berkshire Hathaway Inc., JPMorgan Chase & Co., Johnson & Johnson, Exxon Mobil Corp. and AT&T Inc.

No objection

Among advisers, there is a repositioning in favor of value stocks, he said.

“It’s an important theme right now,” he said.

“If you’re going to be long value, I don’t see why you wouldn’t leverage it with downside protection when the only thing you’re giving up is 2.4% in dividends.

“From a risk-management standpoint, I don’t know why you wouldn’t do something like this.”

If investors are “giving up” about 10% in dividends over the 4Ľ-year period, the breakeven level above which noteholders will outperform the total return of the index is about 5% per year.

“The leverage makes a big difference,” he said.

“I wouldn’t do the note if it was one-to-one on the upside.”

In return, noteholders get 30% worth of contingent protection.

“What you’re gaining from giving up that 10% is a large chunk of downside protection,” he said.

“People who push back on a note because they’re not getting the dividends are completely oblivious to the amount of risk the note helps you avoid.”

Barclays is the agent. Morgan Stanley Wealth Management is a dealer.

The notes (Cusip: 06747D742) settled on Monday.

The fee is 3%.

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