BofA’s leveraged market-linked step-up notes on index basket need protection, advisers say

By Emma Trincal

New York, May 24 – BofA Finance LLC’s leveraged market-linked step-up notes due May 2021 linked to a global equity index basket offer a diversified and global equity exposure, advisers said. The bullish bias combining a digital return and upside leverage is also a plus. But at this stage of the equity market boom they were more than reluctant to invest in a note with up to 100% of principal at risk.

The basket is made up of the Euro Stoxx 50 index with a 50% initial weight, the MSCI Emerging Markets index with a 25% initial weight and the S&P 500 index with a 25% initial weight, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket finishes up to or above the step-up level – 120% of the initial level – the payout at maturity will be par of $10 plus 1.45 to 1.65 times the basket gain.

If the basket is flat or increases, but is below the step-up level, the payout will be par plus the step-up payment of 20%.

Investors will be exposed to any losses.

Global play

“It’s a nice basket. It’s globally diversified across domestic equity, Europe and emerging markets,” said Steve Doucette, financial adviser at Proctor Financial.

Doucette said he likes emerging markets the most.

“A lot of market strategists will tell you that it’s the only place where you’re going to get real returns in the next 10 years. I sort of agree with that. It’s a pretty decent bet for the next seven to 10 years.

“But emerging markets is also one of the most volatile asset classes and you’re in it only for three years.

“I wouldn’t touch this note without a buffer,” he said.

The old bull

As always for Doucette, the main challenge for any portfolio manager is timing.

“You’re obviously optimistic going out another three years because that’s the only way you’re going to outperform the basket,” he said.

He would be inclined to be more cautious.

“I would try to shorten the duration and get a little bit of protection.

“I can’t imagine that we’re going to run another three more years of this bull market.

“We’re already way beyond the average length of a bull cycle,” he said.

The current bull market, which began in March 2009, is the second longest one in history after the 12½-year bull market of the 1990s, which began in October 1987 and ended in March 2000.

Hitting the bear

“We could run up another 10% for the next 12 months and then pull all that back and you’re underwater at the end of the three years with no protection,” he added.

“If we do hit this bear market, and we will at some point, that means very big losses.”

“Look at the average loss in all the bear markets in the U.S. since 1929. We’re talking about 38%, 40%.

“After such a long bull run, I wouldn’t take a chance going three years out without a buffer.”

International tilt

Matt Medeiros, president and chief executive of the Institute for Wealth Management, held a similar view.

“I really like the underlying. It’s a core holding in a portfolio, and it’s a well-diversified one. However, the reason I would do this is to have the downside protection,” he said.

“Since you don’t have any, I wouldn’t want to purchase this note.”

“I like the basket though. I like the fact that 75% of it is non-U.S. I like the U.S. But valuations are stretched so it’s good to have a non-U.S. tactical tilt.”

Upside leverage

Medeiros added that the leverage return when the basket is higher than the step level added some value to the structure. Most similar products show a delta one participation above the step.

“It’s nice to have the leverage,” he said.

“Some people see leverage as a defensive feature arguing that you can allocate less for the same notional. I think the protective value of leverage is subjective. Leverage is not going to offset the lack of downside protection.

“It’s a nice global basket. But I couldn’t look at these notes without a buffer.”

The notes are guaranteed by Bank of America Corp.

Merrill Lynch & Co. is the agent.

The notes will price in May and settle in June.

© 2015 Prospect News.
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