Deutsche Bank offers Elements linked to value indexes; notes will appeal amid tough markets, advisor says

By Kenneth Lim

Boston, Aug. 7 - Deutsche Bank AG on Thursday said it is offering new series of exchange-traded notes on the Elements platform linked to Benjamin Graham Intelligent Value indexes.

Deutsche Bank on Thursday priced a combined $750 million worth of zero-coupon Elements ETNs due Aug. 14, 2023 linked to the newly created Benjamin Graham Intelligent Value indexes.

The first series comprises $250 million of ETNs linked to the Benjamin Graham Large Cap Value Index - Total Return. The second series also consists of $250 million of ETNs linked to the Benjamin Graham Small Cap Value Index - Total Return. The final series is $250 million of ETNs linked to the Benhamin Graham Total Market Value Index - Total Return.

The indexes track U.S. stocks selected according to a methodology based on value investing pioneer Benjamin Graham's ideas. The indexes, which will be re-allocated semi-annually, will focus on businesses deemed to have strong, liquid balance sheets that trade at a discount to their implied intrinsic value. Nuveen HydePark Group, LLC, which will manage the indexes, created them on July 28.

At maturity or when put by the investor, each $10 par note will return the same percentage change as its relevant underlying index less an annual investor fee equal to 0.75%. Investors will gain and lose 1% of their investment, before fees, for every 1% increase and decrease in the index.

Investors may put the notes beginning Aug. 13, 2008 subject to a minimum redemption amount of $2.5 million in stated principal amount.

The Benjamin Graham Large Cap Value Elements will trade on NYSE Arca under the symbol "BVL." The Small Cap Value Elements will trade under the symbol "BSC" and the Total Market Value Elements will trade under "BVT."

Nuveen Investments and Merrill Lynch & Co., Inc. will be the distributors of the notes.

"The Elements ETNs linked to the Benjamin Graham Intelligent Value Indices offer a convenient way to access the pioneering investment philosophy of Mr. Graham," Deutsche Bank Global Markets director Michael Nadel said in a statement. "We are pleased to once again partner with Nuveen and Merrill Lynch to bring innovative products to market."

Nuveen managing director Michael Forstl also stated: "Benjamin Graham advocated a consistent, objective investment style based on seeking out high-quality businesses with strong liquid balance sheets - a concept that would later come to be known as value investing. We're pleased that we can offer investors, through the exchange-traded note structure, a quantitative approach to value investing designed and implemented by our HydePark team."

Notes feed hunger for returns

An investment advisor said the notes will attract investors who are seeking better returns in a down market.

"When all the major indices aren't doing well, people put a premium on alpha investments, investments that basically have a strategy behind it that offers the potential to beat the markets," the advisor said. "Equities and fixed-income are all doing poorly, and a lot of people are desperate just for something that's not negative."

The advisor thought that the use of the Benjamin Graham brand was interesting.

"Well, that's certainly a very prominent name that they got on the notes," the advisor said. "Hopefully the algorithm they have in their index matches that name...Everybody understands the basic ideas behind value investing, right? At least I think most people do. But the problem is how do you know what's value, and because now you have it in an index, how to you turn it into a formula that works all the time?

"I haven't looked closely at the index, but looking at the charts, two of them historically seem to have consistently outperformed the Russell Value index, so that's a good sign," the advisor said. "The small cap one looks more like it was 50-50, but that's against another value index, so maybe their algorithm doesn't work as well with small caps."

Innovation benefits investors

The advisor said new products like the Deutsche ETNs give important flexibility to investors and investment advisors.

"More choice is always better," the advisor said.

Investors can use the ETNs as an alternative to value-biased funds, the advisor said.

"This is the first ETN I know that's really focusing on a fundamental value investing type of strategy," the advisor said. "The first thing that comes to mind is now instead of investing in a mutual fund or ETF linked to the Russell Value index, for example, I can invest in one of these instead. I think the fees will be lower, and the tax treatment is more favorable for now. I think it's an interesting product."

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