HSBC links again to Berkshire; attractive underlying, but product must fit portfolio, adviser says

By Kenneth Lim

Boston, Dec. 3 - HSBC USA Inc. offered a second product linked to the common stock of Berkshire Hathaway Inc. after an earlier reverse convertible in November drew respectable sales.

HSBC plans to price zero-coupon equity buffer notes due Dec. 29, 2011 linked to the class B common stock of Berkshire Hathaway.

The payout at maturity will be par plus 150% of any increase in Berkshire Hathaway's share price, subject to a maximum return that is expected to be 30% to 38% and will be set at pricing. Investors will receive par if the share price declines by 20% or less and will lose 1% for every 1% that the share price declines beyond 20%.

The buffer notes come on the back of HSBC's sale in November of $847,000 of 14% reverse convertibles due March 2, 2009 linked to the same stock.

The reverse convertibles will pay par at maturity unless Berkshire Hathaway shares fall by more than 30% during the life of the notes and finish below their initial level. Otherwise the payout will be a number of Berkshire Hathaway shares equal to $1,000 divided by the initial price.

Desire for outperformers

Interest in the Berkshire Hathaway-linked products is probably due to a desire among investors for ideas that could potentially do well even in a weak market, an investment adviser said.

"I'm not surprised they managed to sell these," the adviser said. "Investors are desperate for ways to do better than the S&P.

"A year ago everyone wanted to make a profit, now they just want to outperform the market. From the issuer's standpoint, I imagine you could offer investors an interesting story either by coming up with a structure that can make them money even in a market like this, or you simply find an underlying that seems like it could beat the odds and link to it using a structure you already have. I think in this case it's clearly the latter case. Berkshire Hathaway has been quite a consistent outperformer, so it's not such a bad idea, actually."

Need to consider portfolios

The adviser did not buy the reverse convertibles for clients, and had not had time to consider the new product.

But "my clients aren't paying me to copy Warren Buffett," the adviser said, adding that "Berkshire Hathaway might look like a great stock to own, or in this case, to link to, but you really have to look at it from a bigger portfolio perspective."

Investors need to figure out how the product fits in their portfolio, the adviser said.

"What need does it fulfill in the portfolio?" the adviser said. "What would you consider the risk profile of Berkshire Hathaway and what sectors are you getting exposed to? You have to think about that, because if Berkshire Hathaway is heavily in financials right now and you're going to become overexposed to financials, you might want to consider this only if you're switching out of some other financials. And you have to think about that in terms of the structured product as well."

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