GS Finance’s $43.21 million dual directional on S&P 500 offers better alternative to long play

By Emma Trincal

New York, April 24 – GS Finance Corp.’s $43.21 million of 0% dual directional buffered Performance Leveraged Upside Securities due May 5, 2025 linked to the S&P 500 index offer several attractive features allowing noteholders to outperform a long position in the index except in a very bullish market, advisers said.

If the index finishes above its initial level, the payout at maturity will be par plus 1.5 times the gain, capped at $1,206 per $1,000 note, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls but not by more than 15%, the payout will be par plus the absolute value of the return of the index.

Otherwise, investors will be exposed to any decline in the index beyond the buffer.

“It’s a no-brainer. I would do it,” said Carl Kunhardt, wealth adviser at Quest Capital Management.

“If you believe that we are near the bottom of the market dislocation or that we’ve passed the worst, this is a pretty decent, straightforward note.”

Forward-looking

The S&P 500 index returned a small gain in the fourth quarter and rose nearly 8% in the first quarter, he noted.

“Most portfolios are up this year, depending on how much risk you’re taking,” he said.

Many economists are still forecasting a recession. But Kunhardt was optimistic.

“The economy is backward-looking. The market is forward-looking.

“And right now, the market suggests the worst has passed and that we’re already into a recovery,” he said.

While there is no guarantee that the market will finish positive in two years, Kunhardt was confident that it will.

“Last year was already a pretty bad year. Even if 2023 was also negative, no market has been down longer than two years,” he said.

Much better off

The use of a single underlier rather than several in a worst-of payout was also welcome. Kunhardt said he liked the plain-vanilla benchmark.

“The S&P is the U.S. large-cap index, which I always have one way or the other in my portfolio either in the form of a growth fund or as an index fund. I can easily allocate the note to my large-cap core position,” he said.

The note was more attractive than a long position in the underlying, he added.

“I have the leverage, the buffer, the absolute return, which are features I don’t have access to if I own the position long,” he said.

“The only thing that is dangling is the cap. I’m capped at 10% a year. Does it matter to me? No, because I expect the market to return 8.5%. If you don’t like a 10% a year return, then you’re just being greedy.

“My goal is to get rational returns while controlling the risk. That’s my job as a planner. This note allows me to do that.”

High cap

A financial adviser said he was pleasantly surprised to see the inclusion of a buffer, absolute return and leverage on a short-dated note.

“Having those terms with a pretty high cap, the equivalent of 9.8% per year compounded, that’s pretty good for a two-year note,” this adviser said.

“On a four-year, no big deal... But to price all those things on a two-year note, that’s intriguing.

“And to think that they were able to do this with a gargantuan fee is even more stunning,” he said referring to the 2.5% fee disclosed in the prospectus.

“No matter how they did it, if it benefits the client, I’m fine with it.”

The 9.8% cap made sense for most scenarios even under the assumption of an upcoming recession, according to this adviser.

Bullish assumptions

A “normal or good” outcome would be an index performance of 10% to 20% for the two years, he said, in which case the cap would not be a problem.

“You could see that type of scenario even if we have a recession. In this case, you would outperform with the leverage, and the cap would not matter,” he said.

Another likely scenario would be a market decline in the first year followed by a recovery, in which case, the S&P 500 index would finish in the high-single digits over the full period.

“If you can get 15% instead of 10%, it’s not too shabby,” he said.

Bear cases

In a bearish scenario, the market could typically drop 20% in the first year. In order to go back to break even, the index would have to rise 25% in the second year, he said.

He assumed a 20% decline in the first year, followed by a positive return of 20% in the second year.

“You don’t break even, and you finish negative for the period. But if at the end of the two-year your negative performance is less than 15%, say you’re down 10% or 14%, you have the absolute return. You wildly outperform,” he said.

Investors will still outperform even if the decline exceeds the buffer strike regardless of the amount of decline.

“I don’t see the market falling by 30%. The S&P is rarely down 30% over a two-year time. If you had a worst-of with the Nasdaq or the Russell though, then yes, it could happen,” he said.

But even in the unlikely scenario of a 30% drop, noteholders would lose 15% and not 30%.

“It’s more likely that this bearish scenario could drive the index down 20% over the period,” he said.

“In this case, you only lose 5%. That’s an even greater level of outperformance than on the upside, thanks to the absolute return.”

Precious buffer

The two-year tenor involved more risk than longer maturities, but intermediate terms may be just as risky, he said.

“There is always a risk. We often assume that two years is not long enough for the market to recover. You may also argue that a three-year term could be just as bad because the market could be down, then up, then down again. You just don’t know,” he said.

“A longer term, four or five years tends, to lessen the risk of a negative outcome – it’s a full market cycle.”

The combination of a buffer on a shorter-dated note was what made the deal so appealing.

“This 15% buffer is extremely valuable,” he said.

Conservative play

Very bullish investors would be the rare category of clients unhappy with the notes, he said.

“Those permabulls never want any cap. For them, a 10% cap on the upside would be awful.

“But if you are a nervous investor approaching retirement, the notes may be a very good opportunity to get equity exposure with moderate risk,” he said.

“I could tell this client – let’s get money out of the money market funds yielding 4% and put $10,000 or $15,000 into that note. You’ll get a much better upside potential while significantly reducing your risk.

“This is a really good note.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent. Morgan Stanley Wealth Management is the dealer.

The notes settled on April 19.

The Cusip number is 40057RDP0.

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