Advisers welcome buffer in Barclays’ dual directional notes linked to S&P 500, Russell 2000

By Emma Trincal

New York, Nov. 18 – Barclays Bank plc’s 0% dual directional notes due Nov. 29, 2024 linked to the lesser performing of the S&P 500 index and the Russell 2000 index provide buffered protection and an absolute return, a combination advisers said offered value to investors.

If the lesser-performing index’s return is greater than or equal to zero, the payout at maturity will be par plus 1.14 to 1.17 times the lesser-performing index’s return, according to a 424B2 filing with the Securities and Exchange Commission.

If the lesser-performing index’s return is less than zero but greater than or equal to negative 20%, the payout will be par plus the absolute value of the lesser-performing index’s return.

If the lesser-performing index’s return is less than negative 20%, investors will lose 1% for every 1% that the lesser-performing index declines beyond 20%.

Timely

Carl Kunhardt, wealth adviser at Quest Capital Management, said that owning the note was a better alternative to investing directly in the index funds.

“I love it,” he said.

The absolute return feature first caught his attention.

“It’s a great note if you are unsure of the market,” he said.

The note could easily be used as an equity substitute in a portfolio.

“Everyone is exposed to some extent to U.S. small and U.S. large cap,” he said.

“The five-year [term] becomes irrelevant because I’m always going to be long those two asset classes. Always. It’s part of anyone’s asset allocation.”

Leverage and dividends

Kunhardt noted that the upside leverage factor, rounded to about 1.15x, was not very high.

“All it’s doing is making up for the loss of dividends. The Russell doesn’t pay much dividend, so that’s OK. It’s mostly a wash with the loss of dividends on the large-cap,” he said.

The Russell 2000 yields 1.3%, and the S&P 500 yields 1.9%.

Buffer

But what made the note particularly attractive in his view was the downside protection.

“I love that it’s a real buffer,” he said.

“It’s unlikely that you’re going to go down more than 20% in five years. But even if you do, if you’re down 25%, you’ll only lose 5%. This is what I’m interested in when I buy a note.”

He offered an explanation pointing to the key question he always asks himself when considering a structured note for his portfolio: “Am I better off with this note than I would be being long the index?

“No question about it; the answer is yes with this one.

“The absolute return is the cherry on top. I would buy it even without it because the structure is very attractive.”

‘Unlimited dials’

Jerry Verseput, president of Veripax Financial Management, said he could use more protection.

“I haven’t seen a buffer component in an absolute return before. It’s always with a barrier. That part is very attractive,” he said.

The absolute return feature was a good but not essential feature to have, however.

“There is a cost to it. And having the absolute return plus the buffer means you have to give up something,” he said.

Every term in a structured note is the result of a particular trade-off, he explained.

“There are unlimited dials you can play with,” he said.

“Without the buffer you probably would have a deeper barrier, or you would have more upside leverage.”

Necessary buffer

He said he liked the idea of a buffer. The uncapped upside was not necessary.

“Having a hard buffer is very compelling, especially at this stage of the market cycle. The need for downside protection has increased compared to five years ago,” he said.

But Verseput would have wanted to see more downside protection.

“You already miss the dividends. Say you miss 8% worth of dividends over five years. Your range of protection really isn’t between zero and negative 20%. It’s between negative 8% and negative 20%.

“And on the upside, the leverage is limited.

“It looks like you’re not going to make a lot of money on this one.”

Missing out vs. losing money

But “making a lot of money” in the current environment – in other words, pursuing growth – was not Verseput’s top priority.

“I don’t think the unlimited upside is going to help you out. It’s a nice feature when stocks are cheap. But when the market is at all-time highs, I’d rather cap my upside and get a deeper protection,” he said.

“At this stage of the bull market, I would be perfectly happy with an 8% to 9% annualized return over the next five years.

“I’d rather take the risk of missing out and reduce my risk of losing money.

“I’d want more of a deterministic return that can help me survive the next recession.”

Barclays is the agent.

The notes will price Nov. 25.

The Cusip number is 06747NPY4.

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