Citi’s trigger performance notes tied to Vanguard FTSE EM fund are not for the faint of heart

By Emma Trincal

New York, Feb. 8 – Citigroup Inc.’s 0% trigger performance securities due Feb. 26, 2021 linked to the Vanguard FTSE Emerging Markets exchange-traded fund offer a bullish bet on emerging markets, but the volatile asset class makes this investment only suitable for aggressive investors, a financial adviser said.

Another adviser said he would not consider the notes at all due to the bearish trend seen in emerging markets, which he expects to worsen.

If the fund finishes above its initial level, the payout at maturity will be par of $10 plus 165% to 175% of the gain. The exact upside participation rate will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If the fund falls but finishes at or above its trigger level, 75% of the initial level, the payout will be par.

Otherwise, investors will be fully exposed to any losses.

One size doesn’t fit all

Carl Kunhardt, wealth adviser at Quest Capital Management, said he always maintains an allocation to U.S. large-cap equity for all of his clients regardless of their investment style.

“But I’m not of the opinion that everybody needs emerging markets in their portfolio,” he said.

“If you are a 75-year-old retired couple, I’m not going to put you in emerging markets.

“Even if you were a 30-year-old, I wouldn’t put this asset class in your portfolio right now because I don’t see any benefit or advantage of emerging markets in the near term.”

But this would be for a short-term note.

“The term of this note gives me pause. The attractiveness of it is the point to point,” he said.

“For an accumulating client with a modestly aggressive to aggressive profile, it makes sense because emerging markets represent a growing slice of the global capital markets.”

For clients willing to tolerate the volatility of the underlying, he would consider a small percentage of the portfolio in the asset class – anywhere between 3% and 7% of the assets.

The accumulating phase in investing is the period when investors who still live off their wages save capital for their retirement.

“What makes the notes interesting is the term. Short term, I don’t think you can avoid the volatility in the asset class. In five years, emerging markets may be booming. It may be a good opportunity to have exposure for the long haul. But again, you have to have the risk tolerance for it.”

Volatility

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said that the timing of the notes was not best. He believes the Vanguard FTSE Emerging Markets ETF is likely to drop further in price in the near future.

China represents the bulk of the ETF with 29.6%, he noted. Next is Thailand with 14.7% and India with 13.2%.

“I don’t think emerging markets are the place to be right now. Despite the fact that the ETF is already down a lot, I don’t think 25% five years from now is an adequate protection,” said Chisholm.

He was referring to the contingent protection offered by the 75% trigger.

“Emerging markets are notoriously volatile. When they trend, they trend.

“The share price of this ETF can easily drop further from where it is at now. It could be down 25% this year.”

The ETF price has declined by nearly 27% in the past 12 months.

Bearish view

“The dynamics in the world are not encouraging. A lot of those countries have their debt in dollars, and the dollar is stronger. It’s becoming increasingly difficult for them to service their debt.”

Some elements in the structure were attractive, he said, citing the uncapped and leveraged upside and the unleveraged downside.

But the absence of a cap has limited benefits when the market trend is bearish.

“If the market drops a lot from now, we’ll have to be back from where we are today in five year. I am not too optimistic about that.

“In five years, a lot can happen.”

Citigroup Global Markets Inc. and UBS Financial Services Inc. are the agents.

The notes will price Feb. 24 and settle Feb. 29.

The Cusip number is 17323P629.

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