RBC, JPMorgan offer absolute return products; structure gets attention amid uncertainty, distributor says

By Kenneth Lim

Boston, July 1 - Absolute return products by Royal Bank of Canada and JPMorgan Chase Bank, NA reflect increased investor interest in products that can pay positive returns even when the market is down, a distributor said.

RBC links to Russell 2000

RBC plans to price zero-coupon principal protected absolute return notes due July 30, 2010 linked to the iShares Russell 2000 Index fund.

At maturity, each note will pay par of $1,000 plus the absolute return of the underlying fund if the fund closes within a range during the life of the note. The upper barrier of the range is 130% of the initial price, and the lower barrier is 70% of the initial price.

If the fund has closed outside of the barrier during the life of the note, investors will receive par. Investors will receive at least par.

Absolute return notes gather steam

The absolute return structure has become more popular over the past year, a distributor said.

"When the underlying market isn't doing well and there's a lot of uncertainty, products that can offer some kind of downside protection, or even better, returns regardless of whether the market is up or down, products like these naturally become more appealing," the distributor said. "Not a big surprise."

Principal protection has also gotten more attention, the distributor said.

"Again, when there's uncertainty about where the market is heading, investors will place more value on structures that can protect them in case something goes wrong," the distributor said.

The distributor said absolute return notes mainly offer investment solutions for neutral-to-bearish views.

"The idea behind absolute return is to offer the potential of a positive return even if the market is not doing well," the distributor said. "If you're bullish about the underlying, you'd be more interested in products that offer leveraged participation."

The downside protection usually comes with a cost, however.

"Obviously if you want principal protection and absolute returns, it will cost the investor in terms of the payout," the distributor said. "The participation rate probably isn't as high. If there's no principal protection, you might also get leveraged downside."

JPMorgan offers dual-directional CD

Also in line with an overall increase in the issuance of structured certificates of deposit, JPMorgan is offering a series of zero-coupon absolute-return CDs linked to the S&P 500 index due Jan. 29, 2010.

At maturity, if the underlying index has not closed outside of a certain range during the life of the CDs, investors will receive their principal plus at least 100% of the absolute return of the index subject to a return cap of at least 121% of the principal. The upper knock-out level of the range will be between 121% and 123% of the initial level and the lower knock-out level will be between 77% and 79% of the initial index level.

The participation rate and knock-out levels will be set at pricing.

If the index has closed outside of the range during the life of the notes, investors will receive their principal.

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