JPMorgan’s review notes tied to Russell 2000, S&P 500 offer high growth equity replacement

By Emma Trincal

New York, April 20 – JPMorgan Chase Financial Co. LLC’s 0% review notes due April 29, 2021 linked to the lesser performing of the S&P 500 index and the Russell 2000 index feature an unusually high call premium even for a worst-of, financial advisers said, making the notes a better fit in an equity rather than fixed-income allocation, they said.

The notes will be called at par plus an annual call premium of 14.6% if each underlying index closes at or above its initial level on any of four annual call dates, according to a 424B2 filing with the Securities and Exchange Commission.

The payout will be par unless either index finishes below its 70% trigger level, in which case investors will be fully exposed to any losses of the worse performing index.

Equity-like return

Income investors may not like investing in autocallables when they seek steady cash flow. The double-digit call premium is more in line with what equity investors would be looking for, said Steve Doucette, financial adviser at Proctor Financial.

“It’s almost 15%. That’s a nice 60% return over four years if you don’t get called,” he said.

“It’s an equity replacement product. The 30% protection is good. But it wouldn’t be enough for a fixed-income substitute.”

Barrier makeover

If Doucette decided to show this product to income investors he would change the parameters of the deal, giving up some of the upside for a larger barrier.

“Your average bear market is down 37%. At 60% you’d have at least 40% protection. I think it’s unlikely to breach at this level. You would have to accept a lower return but hopefully you can still get something decent.

“I like to do 50% barriers for fixed-income replacement but when you get to 50% you have to look at your coupon and decide if it makes sense to lose that much upside.”

After the bear

Doucette however said he was “hesitant” when looking at the four-year term of the notes. His concern was to miss some of the upside potential.

“If the market goes down it may be a couple of years before it goes back up. But sometimes it goes back quickly,” he said.

“Theoretically you could be better off being long the index, especially if we get a bear market soon. Bear markets don’t last.”

The “hard part” in deciding to invest in a structured product is always the timing, he said.

Overall though, the profile of the product was attractive.

“You have a very attractive upside and a good downside protection. I usually don’t like caps with full downside risk. But this is a pretty high cap.”

Full return

Another attractive feature was the call frequency and also the possibility to cumulate the call premium each year.

“They do it on a yearly call date. I’ve seen it done quarterly. With the yearly call, you know you’ll get at least 14% if you get called and not a fraction of that,” he said.

The observation date set annually instead of quarterly reduced the reinvestment risk as well.

Excess return potential

Matt Medeiros, president and chief executive of the Institute for Wealth Management, said the notes offered an “interesting” cap.

“I usually don’t like having limited upside with unlimited downside. But this is a little bit different,” he said referring to the size of the cap.

“Since these two asset classes have a pretty high correlation and both having relatively high multiples, I think the return expectations that we have for these indexes are lower than the payout amount on these notes per annum.

“I find that attractive.”

Medeiros also liked the annual observation.

“When it’s a quarterly call, you don’t have the opportunity to budget your risk long term and your portfolio.

Medeiros made exception to one of his rules, which is to use buffers rather than barriers whenever possible.

“Generally speaking I am not a fan of barriers but since it’s a long term note based on two relatively correlated indices, I am comfortable with this barrier. I think a 30% barrier is within reason.

“This is definitely an equity-like investment. It’s growth equity, certainly not a value play.”

J.P. Morgan Securities LLC is the agent.

The notes will be guaranteed by JPMorgan Chase & Co.

The notes will price on April 26 and settle on May 1.

The Cusip number is 46646Q5X9.

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