Barclays' equity allocation notes let investors spread bets, distributor says

By Kenneth Lim

Boston, May 20 - Barclays Bank plc, through UBS Financial Services Inc., is offering a series of five-year performance allocation securities linked to the best performing of three global equity portfolios.

The product offers investors an easy way to spread their bets among different strategies with a small initial investment, a distributor said.

Barclays plans allocation notes

Barclays plans to price the notes due June 28, 2013 linked to the best performing among three global equity portfolios.

At maturity, investors will receive par of $10 and the return of the best performing portfolio. Investors could thus lose some or all of their principal if the best performing portfolio has declined.

Each portfolio will have different weightings of three regional index baskets. The U.S. basket comprises the S&P 500 index. The International Developed Market basket has a 40% weight of the Dow Jones Euro Stoxx 50, 25% weight of the FTSE 100, 20% weight of the Nikkei 225, and 7.5% weight apiece of the Swiss SMI and the S&P/ASX 200. The Asia Ex Japan basket consists of 25% weight apiece of the Hang Seng and Kospi 200, 15% weight apiece of the Hang Seng China Enterprises and MSCI Taiwan, and 10% apiece of the MSCI Singapore and Thai SET50.

The first reference portfolio has a 60% allocation to the U.S. basket, 10% to the International Developed Market basket and 30% to the Asia Ex Japan basket. The second reference portfolio has a 30% allocation to the U.S. basket, 60% to the International Developed Market basket and 10% to the Asia Ex Japan basket. The third reference portfolio has a 10% allocation to the U.S. basket, 30% to the International Developed Market basket and 60% to the Asia Ex Japan basket.

Notes ease investment costs

The notes offer an easy way to gain access to the different allocations, the distributor said.

"When you see a product like this that's linked to the best of a number of portfolios with different allocations, it's usually a way for investors to get exposure to those portfolios without having to actually invest in them," the distributor said.

"If I want to invest have a diversified portfolio with exposure to the U.S., Europe and Asia, I could set up a portfolio with my broker, and there are a few things that are going on there. One is I'll have to pay a bunch of fees and I have to keep watch over the portfolios and the allocations. The other thing is I have to decide how much to allocate to each region."

The best-of structure takes some of the guesswork out of the investment, the distributor said.

"After five years, maybe the U.S. markets are doing really well, then you'd get the returns from the portfolio that gives the most weight to the S&P 500," the distributor said. "But if it's Europe that's beating the hell out of everyone else, then you'll get the one that gives you the most out of Europe."

Retail investors who are uncertain about which region will do better will likely find the product attractive, the distributor said.

"This could be attractive to retail investors who want to diversify their portfolios away from just the U.S. market, but they're not sure how much exposure they should get to the different regions," the distributor said.

Principal risk low for notes

The distributor said that although the notes are not principal protected, investors are unlikely to lose much of their principal.

"Historically equity markets will go up over a long enough period," the distributor said. "Over five years, the chance that all those stock markets are down is extremely unlikely. The fact that your exposure is spread out over so many indexes and the allocation for each is optimized means that you are in fact unlikely to lose much, if any, of your principal."

But investors stand to lose relative to other investment alternatives, the distributor said.

"In order to get the best of the three portfolios, investors have to take the risk that they may underperform some other investment," the distributor said. "First of all, this is an equity-based investment, so you stand to lose out relatively to some other asset class like bonds or commodities, for example. You could also underperform the market because you can't change those allocations in each of the portfolios, so there's a risk that those aren't the optimum allocations. These are also not principal protected, so even if the risk is low, there's still a risk that you could lose some of your capital."

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