Citigroup's trigger PLUS tied to WisdomTree Japan to attract Japanese equity bulls, yen bears

By Emma Trincal

New York, Nov. 19 - Citigroup Inc.'s 0% trigger Performance Leveraged Upside Securities due Dec. 2, 2015 linked to the WisdomTree Japan Hedged Equity fund are designed for bulls who want to participate in the Japanese rally and are confident that the trend will be sustained given the Japanese government's continued effort to reflate the economy through a monetary stimulus, a financial adviser said.

The payout at maturity will be par of $10 plus 150% of any gain in the fund, up to a maximum return of 28%, according to a 424B2 filing with the Securities and Exchange Commission.

Investors will receive par if the fund falls by up to 15% and will be fully exposed to losses from the initial level if it drops below the 85% trigger level.

The underlying fund offers exposure to Japanese stocks while at the same time hedging exposure to fluctuations between the value of the dollar and the Japanese yen. As a result, investors will benefit from any depreciation of the yen relative to the dollar.

Abenomics

The theme of the investment in the underlying fund is to capitalize on the Japanese equity rally, which followed the election at the end of last year of Shinzo Abe, the country's prime minister, who launched a stimulus program in an effort to reflate the economy, allowing for a depreciation of the yen, explained Dean Zayed, chief executive officer with Brookstone Capital Management.

The yen spot rate versus the dollar has trended downward as a result while Japanese stocks have rallied, outperforming the U.S. market.

The WisdomTree Japan Hedged Equity fund is up 34% year to date, versus 25% for the S&P 500.

"As it is the case with many of these notes, you've got to have some sort of tactical interest. In this case, you have to want to be exposed to Japan. You should be bullish on Japanese stocks and bearish on the yen," Zayed said.

"Then, once you know your investment goal, you have to find what's the smartest way to get there.

"You can buy outright the ETF, but you get no protection.

"The notes will give you the downside protection. The terms, in my opinion, seem pretty competitive. Even the cap is quite competitive at these levels.

"Again, ask yourself if you want to have this type of exposure. That's the first decision. And if you say yes, is it a good product for you to get that exposure?

"I would say yes. I like the two-year [tenor]. The barrier is decent. It's very appealing."

Abe's increased money supply and his call for a weaker yen so far have rewarded investors in Japanese stocks in ways similar to how low interest rates and quantitative easing used by Federal Reserve chairman Ben Bernanke have propelled U.S. stocks to new highs, he said.

"Similar to what we've seen with our own Fed and our own monetary policy, there doesn't seem to be any reason that they will change what they've done," he said.

"I'd be bullish on Japan at this point. The currency hedge is an added bonus that enables you to gain from a lower yen, which seems to be the trend given the prime minister's policies.

"It's a pretty solid structure."

Steven Foldes, president and chief executive of Foldes Financial Management LLC, had a different view, saying that the notes' structure fails to meet his requirements.

Cap

"I don't like it for several reasons," Foldes said.

"First, we don't invest in single countries other than the U.S. We like to have more diversified international exposure. But that's not the main reason.

"The main reasons are, number one: We don't like having a cap of only 28%. It's not 14% a year. It's more like a 13% annualized compounded rate of return. If you're looking at a 13% return per year, that would be a non-starter for us, especially for this index. This fund is already up nearly 35% so far, and the year is not over yet. We would be doing our clients a great disservice by capping their participation in the fund at 13%. We would never enter into a structured note where on a compounded basis you're only looking at 13% a year. We don't like to be capped out so low."

Leverage, barrier

"The second reason we don't like it is the leverage factor. We like to have at least two times," he said.

"So you're getting a low cap. You're not getting a nice leverage factor, which is the two times that we're accustomed to.

"And the downside is not even a straight buffer. It's only a barrier. With that type of underlying, getting a 30% or 35% barrier would be a different story. But 15% is weak, very weak, especially for that type of fund, which can be very volatile. We would always prefer a buffer anyway, as it's the absolute protection. A barrier is not an absolute protection. When it's breached, the protection disappears.

"In my view, you're getting the worst of all worlds. It's a barrier protection. There's a very modest leverage factor and a very modest cap.

"It may be an interesting structure if you buy off the shelf. But it's not for us."

Foldes said that his firm works directly with issuers, customizing the structure and underlying to its clients' needs.

"We want at least a 20% compounded annualized return. If we can't get at least 40% for the next two years, especially for an asset class like this one, we're not interested," he said.

Citigroup Global Markets Inc. will be the underwriter.

The notes will price on Nov. 26 and settle three business days later.

The Cusip number is 17321F524.

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