RBC’s notes on Raymond James Securities Selections designed for aggressive portfolios

By Emma Trincal

New York, Feb. 1 – Royal Bank of Canada’s notes on Raymond James Securities Selections due Aug. 24, 2022 offer exposure to one of the best-ranked equity research on Wall Street via a single instrument and under one Cusip, advisers said. While the exposure is convenient, the structure comes with no downside protection, making the investment only suitable for aggressive investors, they noted.

The notes are linked to an equally-weighted basket of 20 common stocks selected by Raymond James, according to an FWP filing with the Securities and Exchange Commission.

The reference shares are Alaska Air Group, Inc., Avnet, Inc., AutoZone, Inc., Cadence Bancorporation., Cigna Corp., Eagle Materials Inc., Healthcare Realty Trust Inc., Jabil Inc., KB Home, MDC Holdings, Inc. Mohawk Industries, Inc., Maximus, Inc., National Retail Properties, Inc., Old Republic International Corp., Dave & Buster’s Entertainment, Inc., PROG Holdings, Inc., Construction Partners, Inc., Synnex Corp., Wesco International, Inc. and Wintrust Financial Corp.

The final share price for each stock is the sum of its closing price on the valuation date and its dividend amount.

The payout at maturity will be par times 97.35% of the basket level percentage. Because of the 97.35% participation rate, investors will receive less than par if the basket does not gain by at least 2.73%.

Research powerhouse

Carl Kunhardt, an independent adviser at Quest Capital Management, whose shop is affiliated with Raymond James, said that Raymond James has a long history of making its research available to its advisers.

“Raymond James started 15 years ago with its core growth portfolio. They have an equity research team that’s one of the best in the country. They do things a little bit differently. They have an expertise in small- and mid-cap stocks, which are neglected because everybody is researching large-caps. That’s where they add value. They have a niche in that lesser-covered universe and that’s how they’ve achieved excellence,” he said.

Aggressive play

“It’s for a more aggressive portfolio. You’re really buying that for the research,” he said.

“They have a long track-record of outperforming the market. I’m not just saying that because we are affiliated with them. I used to buy their lists myself.

The reputation of Raymond James’ research can be attributed in part to the talent of Mike Gibbs, he said.

Currently director of portfolio and technical strategy, Gibbs is a renowned stock-picker who joined the firm in 2012 through the acquisition of Morgan Keegan & Co.

Cost

Some clients may ask why not to buy each component of the basket directly.

“You can. But if you want to replicate it you have to buy the 20 companies, that’s 20 tickets. I know the notes are not cheap. It’s kind of pricey to put it together under one ticket but for many advisers it makes sense. It’s easier to monitor,” he said.

The fee is 1.5%, according to the prospectus.

“They also pass through the dividends. Most notes don’t pay dividends. So that’s a plus.”

Eclectic basket

Michael Kalscheur, financial adviser at Castle Wealth Advisors, was not familiar with the notes.

“At first, I was surprised by this basket. It’s an eclectic group... it’s not a bunch of stocks in one particular sector,” he said.

“The selling part is the research component. But I would be interested to see the dynamic of their ranking. Without knowing their methodology or analysis it’s hard to understand why they picked a particular stock.”

Kalscheur said he was comfortable with the issuer.

“RBC is one of the best credits out there. I would have no qualm doing a note with them,” he said.

“The 18-month term is fine. In a taxable account you want to be over one-year.”

Beyond that, the adviser was not impressed by the offering.

“The fee is high for an 18-month,” he said.

Very unusual

“But what really stuck out to me is how different this is from any structured note.”

Most structured notes, he said force investors to give up liquidity and dividends. In exchange, they get some form of return or yield enhancement along with a level of downside protection.

“This note gives you the dividends. That’s very unusual. I can’t remember a time when I had a structured note tied to the total return of the underlying. But that’s fine. On the other hand, you underperform the basket, and they don’t give you any downside protection. Very weird.” he said.

Kalscheur said he was trying to understand what the benefit of the notes would be.

“I guess the trade is you’re getting Raymond James research in a basket of 20 stocks with the dividends. For that you get less than 100% of the upside, no protection on the downside and a hefty fee.”

Kalscheur was willing to assume that the tradeoff was justified.

“I’m getting a dividend so maybe that’s a little bit of a wash. But is it worth giving up 2.65% of the upside? I don’t know. I would have to total the dividend I get from the underlying,” he said.

The glass half full

The average dividend yield of the basket is 1.59%.

Seven of the 20 underlying stocks pay no dividends: Alaska Air Group, AutoZone, Eagle Materials Inc. Mohawk Industries, Dave & Buster’s Entertainment, Construction Partners and Wesco International.

“If I had at least one-to-one upside with a buffer or a barrier. But that’s not the case,” he said.”

“Without criticizing Raymond James’ research, why in the world would anybody do this?”

He said he could only see one reason.

“You buy a list of 15 stocks. Inevitably something is going to go down. Let’s say 15 of them are up, five of them are down. Guess what? It’s human nature to ignore the 15 good stocks and to look at the five losers. Clients will focus on that, that’s for sure and it will derail the conversation,” he said.

“By consolidating the 20 stocks under one note, you’re not looking at 20 different returns. Hopefully, the basket is going to outperform the market. That’s why you’re buying it.”

If this was the rationale, it was still not enough to convince this buysider.

“As an adviser, I would buy the stocks outright. The benefits to the clients are much greater. You get 100% of the return, you can do tax harvesting... you have full liquidity,” he said.

“The cons of that note outweigh any benefits. I would stay clear of it.”

A market participant advanced another reason, which might justify the use of the notes.

“It’s convenient for advisers to have the stocks aggregated in a note. It’s easier to monitor. If you had to do 20 different buy orders at different prices it would be nearly impossible to get it equally weighted. You wouldn’t get round numbers,” he said.

New names

Equity baskets created by Raymond James for use as underliers in structured notes are not a novelty.

But the basket components are never the same.

Some of the component stocks in the basket used in this note have never been seen as underliers in a structured note before, according to data compiled by Prospect News.

Those “new” names are: Cadence Bancorporation, National Retail Properties, Inc., Dave & Buster’s Entertainment, Inc. and PROG Holdings, Inc.

RBC deals

Several issuers have used the research of the firm, for the most part Canadian banks, and for many years.

Royal Bank of Canada issued three deals tied to a Raymond James top selections basket last year totaling $5.6 million. The constituent stocks were different from those listed in the prospectus of this note.

Additionally, Royal Bank of Canada last year priced two offerings linked to Raymond James top selections in technology, a sector basket for a total of $6.7 million.

Giant Best Picks

But nothing compares in size with deals issued in the past by Bank of Montreal, which were tied to another Raymond James stock basket called the Analysts' Best Picks for any given year. Those offerings came out twice a year – in December and January.

As an example of the success of those deals, in January 2017 Bank of Montreal priced $310.24 million of one-year notes linked to a basket of 17 equally weighted stocks selected as Raymond James Analysts’ Best Picks for 2017. A month before, BMO had issued $250 million of one-year notes linked to the same 2017 basket.

Last year, BMO priced four deals on the best picks for 2020 and two for the best picks of 2021 for a total notional of $167.42 million. The largest of those deals in the amount of $57.178 priced in December.

Canadian Imperial Bank of Commerce is another issuer using Raymond James’ research via a basket of stocks for the exposure of some of its structured notes. The Canadian issuer priced notes on the Raymond James securities selections basket as well as notes tied to technology and healthcare baskets, according to the data.

The notes will price on Feb. 19 and settle on Feb. 24.

The Cusip number is 78013GH24.

RBC Capital Markets, LLC is the agent. Raymond James will handle distribution.

© 2015 Prospect News.
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