JPMorgan’s enhanced notes tied to S&P 500 are aimed at investors with low return expectations

By Emma Trincal

New York, Sept. 30 – JPMorgan Chase Financial Co. LLC’s 0% capped buffered return enhanced notes due April 9, 2018 linked to the S&P 500 index offer investors who don’t expect the market to be up by more than 6% a year a chance to outperform the S&P 500 both on the upside via leveraged exposure and on the downside thanks to a buffer, said Tim Vile, structured products analyst at Future Value Consultants.

The investment offers a return of 150% of any index gain up to a cap comprised between 12.25% and 14.25% with the exact cap to be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the index falls by up to 12% and will lose 1% for each 1% decline beyond 12%.

Moderate expectations

“This is for a reasonably bullish investor. You are not getting a very high cap, but at the same time, the market does not need to move a lot for you to get it,” said Vile.

“Many investors have this outlook right now. Markets look overvalued. Corporate earnings have been falling for several quarters. If you don’t expect very high returns in the next 18 months, this note can give you an opportunity to beat the market with the 1.5 times leverage and the 12% buffer.”

Future Value Consultants provides research reports with scores on risk, return and price comparing each product to its peers, which would be “leveraged return” products in this case.

For this report, Vile picked the mid-range cap of 13.25%. This cap would give investors an annualized compounded return of 8.65%, which could be achieved if the index were to increase by 5.80% a year.

“It’s not very ambitious, but if you’re right and if the index goes up at that pace, you can get a decent return, one that’s definitely much better than the index,” he said.

The notes may appeal to conservative investors likely to want a buffer even at the price of a lower cap, he explained.

“It fits the view of a moderately bullish, cautious investor,” he said.

“If things do turn south, especially with the S&P at these high levels, you do get a little bit of protection.”

Risk

Future Value Consultants calculates the market risk and the credit risk of a product and adds the two components to generate the “riskmap,” which measures on a scale of zero to 10 the risk associated with a product with 10 as the highest level of risk possible.

The notes have a 1.62 market riskmap versus an average of 1.75 for the leveraged return category, according to Future Value Consultants’ research report.

“It’s a bit surprising because the S&P is not the most volatile index. One could think that 12% is a good buffer for an S&P product,” he said.

“But it’s still reasonably low risk. The difference in market riskmap between this product and its peers is almost negligible.”

The credit riskmap is 0.52, slightly higher than the average of 0.46 for the product type.

“JPMorgan has very good credit. This small difference is probably due to the maturity. While 18-month is relatively short term, I would expect that the product competes with shorter-dated leveraged notes, which because of that would carry less credit risk.”

Adding the two risk components gives a riskmap of 2.14, compared to the average of 2.21 for this type of product.

Return

Future Value Consultants measures the risk-adjusted return with its return score on a scale of zero to 10 with 10 being the best risk-adjusted return.

The return score is 7.22 versus an average of 7.45 for similar products and 7.08 for all products.

“It’s interesting. The riskmap remains quite low, which helps. But our model based on market prices must have found that the cap is still quite short, bringing the return score down,” he said.

Value

For each product, Future Value Consultants computes a price score that measures the value to the investor on a scale of zero to 10. This rating estimates the fees taken per annum. The higher the score, the lower the fees and the greater the value offered to the investor.

At 8.46, the price score is lower than the 8.76 average for the same product type.

“There’s a lot in there. ... We have a good buffer, some good leverage too. ... Maybe the issuer did not spend enough on the cap,” he said.

Overall

The overall score measures Future Value Consultants’ general opinion on the quality of a deal. The score is the average of the price score and the return score.

The notes have an overall score of 7.84, which is better than the average for all products at 7.66 but less than the average for the structure category of 7.66, the report showed.

“It’s still a reasonably good product with good terms, and there is a place for it for the right kind of investor, especially in this market environment. That said, if you had had a higher cap, those scores would have looked much better.”

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 46646EH62) will price on Tuesday and settle on Oct. 7.

The notes will be guaranteed by JPMorgan Chase & Co.

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