New York – Medley Global Advisors LLC (MGA), a provider of macro policy intelligence for hedge funds, banks, and assets managers, announced earlier this week that it is acquiring the G7 Group from Xinhua Finance Ltd. The original press release is reproduced below.

This transaction raises questions as to the motivations for each one of the three parties involved. The seller, China-based information giant Xinhua, with about 10,000 employees, has seen a reduction in the funding received from Beijing over the past three years. It is possible that this fact has led the company to slice down some of its operations. As we reported back in June, in the first semester of this year Xinhua sold two of its companies, and now it repeats the move by selling G7.

G7, a research provider on political, regulatory, and policy factors affecting international capital markets, will likely benefit from the transaction throug its new association with a prestigious provider of policy intelligence. MGA’s reputation and its corporate structure will bring value to both G7’s already existing clients and thier prospects.

The motivations for the third player, MGA, are less clear than for G7 and Xinhua. The firm might find value in the acquisition by acquiring valuable staff and know-how for a (presumably) attractive price. However, we are sailing in turbulent waters, especially for those in the financial sector which happens to be MGA’s main clientele. Perhaps, MGA is leveraging on the turbulence through an attractive deal that will add exponential value to the firm once the turbulence settles.

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Press Release 

NEW YORK, Nov. 11 /Xinhua-PRNewswire/ — Medley Global Advisors LLC (MGA), today announced the acquisition of The G7 Group from Xinhua Finance, Ltd.  G7 Group has been advising clients on macroeconomic and political developments that affect financial markets since it was founded in 1993.  The transaction will enable MGA to incorporate G7 Group’s products, services and analysts into its broad range of services benefiting the combined customer base. 

    “We are very excited to welcome G7 Group’s employees and customers to the MGA family,” stated Craig Sawin, President of Medley Global Advisors LLC.   “The combination of these two well established brands provides clients with more than twenty five years of experience with the most sophisticated investors, as well as in-depth knowledge of global markets sitting squarely at the intersection of the policy world and financial markets.”

    About MGA

    Medley Global Advisors LLC (MGA) is the leading macro policy intelligence service provider for the world’s top hedge funds, investment banks, and asset managers. MGA analyzes primary sourced and public input from policymakers and applies it to industry and financial markets to help clients and policymakers anticipate key macro and regulatory events that affect them. MGA provides services covering select G7/OECD fixed income and currency markets, emerging markets, telecoms, utilities, and energy markets. It was founded in 1997 and is headquartered in New York City, with offices in Washington DC, London, and Tokyo.

^{New York - A short article written by Douglas McIntyre of 24/7 Wall Street, recaps a Financial Times article that indicates that sell side analysts are still too bullish, despite markets that have fallen between 20 and 30 percent so far this year. The article points to the proportion of sell recommendations to overall recommendations being 6.7 per cent: hard to believe.}

^{The author points out that perhaps this reticence of analysts to issue sell ratings is related to their concern that if they are not positive on a company’s stock, they may lose access to management. We note that in the Institutional Investor survey of best analysts (October 08), access to management is number 4 on a list of 12 attributes that institutional investors feel they receive from their sell side research providers (see table below). However, there are two reasons why this may not be the main reason. First, the II review’s third strongest attribute is analyst integrity, which would seem to trump access to management in the eye of the investor. Second, reg FD, while having leveled the playing field for the average investor has, both put management opinion in the hands of many-thereby diluting its value-and made management less willing to share important information. In either case there is not enough rationale here to explain the lack of sell recommendations.}

^{A far more cogent explanation may be fear of market impact. Let’s look at the current situation in the banking sector. Suppose that a banker indicates to the press that he is concerned that his bank may be overleveraged, or have an insufficient deposit base. These statements could create a run on deposits that would result in the failure of the bank: analogous to what happened to Bear Stearns. Bear probably had stronger capital ratios that most other bulge bracket firms when it was taken down: primarily by rumor and innuendo.}

^{While understanding the motivation does not excuse the behavior, it would seem prudent to completely disregard sell-side analyst research in bear markets. So what should we be looking at for guidance in a bear market? The naturals are the forensics, the quants, the techs and independent fundamental analysts that have no stake in the market. Additionally, there is a much greater need for investors to find their own course. As such, primary research would be a benefit in refining or testing investment hypotheses.}

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Be rest assured that this transaction, like all others involving our hedge fund, is 100% risk free as all modalities have been put in place for a smooth and successful conclusion. However, should you be interested in assisting us, I will not hesitate to furnish you with the access code to our London account, code which you will present at the Bank of England.

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Editor’s Note:  Our website has not been hijacked by Nigerian scam artists.  Thanks to all who have expressed concern that we have taken leave of our editorial senses. 

New York, NY - Over the past five years, one of the fastest growing segments of the investment research business has been Primary Research.  The providers in this segment provide detailed research and / or capabilities that enable analysts to measure the demand for various products and services, or help them gain direct insight into how companies are performing based on feedback from participants within the supply chain or the industry in general.

One type of Primary Research that has seen significant interest from the buy-side has been custom survey work as investors have wanted to gain a unique information edge which will enable them to make better investment decisions.  While we think conducting surveys should be an important part of any analyst’s toolbox, we also think that surveys are often misused, inappropriately designed, or implemented incorrectly - all factors that could limit the usefulness or accuracy of this research tool.

General Overview of Using Surveys

It is critical to start a discussion on the use of surveys as a form of valuable primary research with a suggestion that analysts should examine the real need for undertaking a survey.  Some key questions that analysts should address when considering implementing a survey is “what” is he/she trying to learn, and “why” is survey work a better solution versus other research techniques that might be employed such as focus groups, customer visits, or choice modeling, among others. The research objectives and the character of the project, and of the desired data, determine if a survey is the best choice. This article discusses this topic in greater detail.

Surveys typically provide precise data on frequencies, averages, dollar amounts, etc., thus providing a sell-side or buy-side analyst with a specific framework for taking action. The very nature of survey work allows an analyst to determine the exact number of goods purchased by a respondent last week, but it might not help discovering in-depth details on why or how the purchases were made.

“Surveys are a confirmatory tool whose proper purpose is to limit, narrow, and specify; hence, this tool is largely incapable of expanding, broadening, and reconfiguring your understanding.” (Edward McQuarrie, The Market Research Toolbox: a Concise Guide for Beginners. Sage Publications, 2006, page 32)

Over the last 100 years, market researchers and securities analysts have found significant value in approaching a segment of a determined population - a group of individuals that share common characteristics -, in order to make inferences of interest to the researcher.  Estimation procedures and hypotheses tests are some of the inferences that can be made from survey work.  In opposition to a survey, a census attempts to identify and question all individuals in a specific population.

Errors Associated With Surveys

A critical aspect of survey work is the assumption that the segment addressed is representative of the population of concern to the analyst.  Survey work is based on the probability sampling paradigm, which indicates that when selecting random samples, probability theory can be applied, making it possible to quantify the accuracy of the estimates.

In order to design and conduct a survey that adheres to the probability sampling paradigm, a set of aspects need to be taken into consideration. It is not hard to initiate and complete a faulty survey while believing, erroneously, that the results are trustworthy. Sampling survey theory indicates that the process can be faulty in one or more of the following areas:

• Definition of the project and its objectives;
• Definition of the capabilities of survey work in relation with the project objectives;
• Definition of the characteristics of the population of interest;
• Selection of the sample and its source;
• Selection of the survey methodology;
• Design of the questionnaire;
• Survey administration; and
• Analysis of the results.

All these phases are interrelated in a way that an error in one of them affects the others.  In other words, if the objectives of the project have not been thoroughly defined, the questionnaire cannot be properly designed; if the questionnaire is poorly designed the results will not be reliable for analysis; and so on. A correct application of each one of these stages is crucial to ensure that the data gathered is truly relevant for the researcher’s purposes. This document elaborates further on each one of these stages.

A survey project can be affected by two kinds of errors: sampling and non-sampling errors. Sampling errors arise from scrutinizing a segment instead of the whole population. The concept “sampling error” refers to the variation implied in random sampling. On the other hand, non-sampling errors, can be caused by inaccuracies in the measuring, recording, analyzing, or responsiveness.

Statistics and other disciplines provide tools to estimate and control total error (including sampling and non-sampling errors) in survey work. There is a classic tradeoff between sampling and non-sampling errors. Because of their nature, sampling errors can be reduced by increasing the size of the sample. However, a larger sample will increase non-sample errors such as non-response rate or mistakes in recording.

Strengths and Weaknesses of Surveys

The following chart highlights the major pros and cons of using surveys.

A cautionary remark is should be noted, especially after highlighting the strengths and weakness of using surveys and discussing the kinds of errors that may affect a survey project. Authors have warned against an over-reliance on surveys.  Despite the various ways for identifying and controlling errors within a survey, the researcher must not forget what a survey is:  a probability paradigm that has been tested as accurate in the majority of cases, but not in all. A prudent recommendation is quoted below:

“Think instead of surveys as yielding one more fallible data point, to be combined with other data that are fallible for different reasons, as input to a decision that ultimately remains your own but that is more likely to be successful because you gathered diverse kinds of data.” (Edward McQuarrie, The Market Research Toolbox: a Concise Guide for Beginners. Sage Publications, 2006, page 97)

Glass Lewis & Co. LLC, an independent research firm that provides investment research, class action settlement solutions, and proxy management services, announced yesterday the launching of a new product- Risk Monitor. This web-based application tool will help investors identify the potential risk of their portfolios.

Risk Monitor uses quantitative analysis to take into account factors that are often overlooked by sell-side analysts. Using accounting, legal and regulatory, public companies are ranked based on their relative risk profile. Generated in near real-time, the scores are calculated by tracking 30+ data patterns. Scores are continuously updated in order to adjust for changes in a company’s stock and relative valuation metrics. Risk Monitor will allow users  to measure a company’s relative risk score compared to their portfolio, an industry group, market cap, or index of choice.

Currently, the Top 10 riskiest companies as identified by Glass Lewis are:

Ticker

Company

Risk Score

Industry

1

AMT

American Tower Corporation

100

Communications Services

2

ATVI

Activision, Inc.

100

Software & Programming

3

ILMN

Ilumina, Inc.

100

Scientific & Technical Industry

4

WFC

Wells Fargo & Company

99

Money Center Banks

5

APOL

Apollo Group Inc

99

Schools

6

FRT

Federal Realty Investment Trust

99

Real Estate Operations

7

MFE

McAfee, Inc

99

Software & Programming

8

IMCL

ImClone Systems Incorporated

98

Biotechnology & Drugs

9

ADM

Archer-Daniels- Midland Company

98

Food Processing

10

NI

NiSources Inc

98

Natural Gas Utilities

* The 100th percentile represents the highest risk companies

Information from this story was used in this post

The Financial Industry Regulatory Authority (FINRA) announced recently that it is planning to require firms to put procedures in place between their research departments and their proprietary trading desks to prevent the exchange of non-public information.  This announcement marks a change from the past in that previously such procedures were optional for firms.Forcing separation between research and prop traders has two effects.  The first is a benefit to the buy side in general.  Buy-siders should now feel more comfortable that prop trading desks aren’t getting a jump on positions coming from sell-side research before it is announced.  Clearly, being able to take a position in a firm before a report comes out allows for a substantial amount of money to be made and now at least there will be one less investor taking that position.

The second effect for the research community is to make sell-side research more credible.  Without the added incentive of upgrading or downgrading a stock so that their firm can make money, it is easier to accept the recommendations made in sell-side reports as unbiased.The change is part of a number of tweaks FINRA is currently folding into its rulebook.

The regulator is also clarifying a number of rules in order to make sure that they are not overly restrictive.  For example, a prop trading desk is not prohibited from taking a position so long as it can prove it was trading on readily discernible public information.

  FINRA has however extended the regulation to cover positions in any securities, whether they are listed on an exchange or not.

Information from this story was used in this post.

CORRECTION: In yesterday’s article we included a chart mentioning some independent research firms specializing in various areas. Our chart included various firms in the category of “management,” one of which was “The Corporate Library.” However, this firm is better classified under “Governance,” since their primary mission is to provide independent corporate governance research and analysis.

New York – On an increasing basis questions are being asked about the direction of equity research in coming months. While the outlook is nasty for the overall industry, there are opportunities and niches that will do very well. The view from 30,000 feet is that the sell-side model will be getting much leaner, with a smaller number of analysts covering more stocks.

Classical fundamental analysts can cover between 10 and 15 stocks effectively. If they end up covering 50 stocks, for example, they will be providing a) inadequate coverage or, b) utilizing third party services to fill in the information gaps. We suspect the latter will continue to gain acceptance. As such, opportunities will exist for third party research providers which have particular abilities in these areas.

Beyond looking at the overall economy, typical fundamental research analysts look to a number of factors to help them assess the quality of individual securities, including, but not limited to, the following factors:

The table breaks down some of the major sell-side research elements that may be sourced from third party research providers. The third column is a list of competent providers in these areas—though one should not conclude that these are necessarily the best research providers. We would need to engage in much deeper analysis than can be accomplished in this blog to list the best of the best here. Indeed, Integrity’s ResearchFocus is dedicated to finding the key players within specific methodological disciplines, industries or sectors.

One major third party resource we have not covered in the above table is the expert networks. Expert networks can assist in any of the above categories, by finding qualified experts to confer on any number of topics. Rather than insert them into each category, we focused on firms that specialize in these areas.

New York - What better illustration of the importance of getting the big picture right than the discrepancy between analysts’ earnings estimates and those of strategists?  A recent Barron’s article notes that analysts estimate that earnings for companies in the S&P 500 will grow 29% in the fourth quarter and increase 15% in 2009.  In contrast, strategists polled by Barron’s had earnings falling 15% this year and 3% next.

It’s macro this time, and if you don’t get the big stuff right, sweating the small stuff doesn’t help.  In good times, investors like strategists for their investment ideas and thematic research.  Now, the demands are broader:  which assets, which markets, how bad, how long…the list goes on.

In our 2nd quarter survey of investors, 44% said they use strategists.  We wonder if the remaining 56% are reconsidering?  Studies have shown that bottom up analysis tends to be optimistically biased.  There is nothing nefarious about this, simply the natural tendency to extrapolate.  In good markets, this tendency isn’t a big problem.  Now, it is.   As of January, the consensus estimates for the 3rd quarter had earnings rising 23%, whereas the actuals were approximately -12%.

When analysts lower forecasts it is in the context of their extrapolations, resulting in incrementalism.  The current 4Q forecast of 29% earnings growth is down from a 64% increase forecasted in the spring.  The 15% growth for 2009 is down from 22% forecasted at the beginning of October.

Strategists on the other hand are driven by the factors that are exogenous to the analysts’ models.  And we are in an exogenous world right now.  Analysts have the S&P 500 earning $91 next year.  The strategists surveyed by Barron’s put the earnings at $70.  While better than the bottom up estimates, strategists can be overly optimistic also.  The low estimate of the group surveyed was $60.

What does this suggest for the markets?  As Yardeni Research points out, multiples contract during bear markets.  In the 1975 recession the trailing multiple went to 7 and in 1980 it went to 6.8.  A 7 multiple on $70 earnings is 490, nearly 50% below yesterday’s close of 919.   Keep your eye on the big picture!

New York, NY - The credit crisis and the resulting woes experienced by numerous firms including FNMA, FHMC, AIG, Bear Stearns, Lehman Brothers, and Merrill Lynch has forced both politicians and investors alike to wonder if these firms had appropriate internal and external controls in place to protect the various stakeholders associated with these firms.

Of course, the question of external controls, or regulations, is likely to be a hot topic in the next few years, particularly with the establishment of democratic control of the presidency and both houses of congress.  However, we think an equally important question should be whether these firms had appropriate internal or governance controls in place.

Consequently, we suspect that in the future, a growing number of investors are likely to pay closer attention to the governance policies and other non-financial measures of the strength of public companies.  This trend is likely to make research that focuses on these metrics more and more important.

Last week, UBS Investment Bank revealed its belief in the importance of governance research as it acquired a minority interest in GovernanceMetrics International (GMI), one of the leading providers of research and ratings in the corporate governance area.  As part of this relationship UBS analysts will get access to GMI’s governance ratings to include as part of their analysis.  In addition, UBS will market GMI services to UBS’ institutional client base.  The following is a Press Release which discusses this transaction in more details.

IMPORTANT NOTE:  UBS INVESTMENT BANK ALSO OWNS A MINORITY INTEREST IN INTEGRITY RESEARCH ASSOCIATES, THE PUBLISHER OF THIS BLOG.

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UBS Investment Bank Acquires Minority Interest in GMI

New York, November 6, 2008 - GovernanceMetrics International (GMI), the corporate governance research and ratings firm, announced today that UBS Investment Bank has purchased a minority stake in the company.

Through the arrangement, UBS analysts will have access to GMI’s proprietary content and database, enabling them to factor governance ratings into their stock research. UBS will also work with GMI to expand the firm’s customer base, as well as work jointly on product development and research ideas.

“UBS is always looking for ways to offer our clients access to the most sophisticated and relevant investment information and analytical tools. Now more than ever before, assessing a company’s relative governance characteristics is critical to investment analysis,” said Mark Steinert, Global Head of Equity Research at UBS. “Our partnership with GMI allows UBS to introduce first-rate governance research and data to clients, will enable our analysts to incorporate this important metric into a comprehensive coverage offering and will enable the creation of governance friendly structured products.”

“GMI was established in 2000 under the premise that companies that emphasize corporate governance and transparency will, over time, generate superior return and economic performance and lower their cost of capital. This is as relevant now as it was back then. We look forward to working with our new partners at UBS to help our clients further integrate governance issues into their investment decision making process,” said Howard Sherman, President and CEO of GMI.

“Given the volatility and recent rapid market developments clients are looking for new ways to understand the companies in which they are invested,” added Julie Hudson, UBS’s Global Head of Socially Responsible Investing and Sustainability Research. “We believe standards of analysis and due diligence with respect to governance will become increasingly stringent throughout the investment advisory sector. GMI’s research capabilities address an immediate need in the market, and we are excited to offer their product to our clients.”

The investment by UBS means that that GMI is now backed by a number of the world’s leading financial institutions. Other minority investors in GMI include State Street Global Alliance, a partnership between Boston-based State Street Global Advisors, one of the world’s largest institutional investment managers, and Dutch giant ABP, one of the world’s largest pension funds. Another minority stake is held by Inter-Atlantic Group, a manager of private equity funds focused exclusively on the financial and business services sector.

About UBS

UBS is one of the world’s leading financial firms, serving a discerning international client base. UBS is a leading global wealth manager, leading global investment banking and securities firm, and one of the largest global asset managers. In Switzerland, UBS is the market leader in retail and commercial banking.

UBS is present in all major financial centers worldwide. It has offices in over 50 countries, with about 37% of its employees working in the Americas, 34% in Switzerland, 16% in the rest of Europe and 13% in Asia Pacific. UBS employs more than 80,000 people around the world. Its shares are listed on the SIX Swiss Exchange, the New York Stock Exchange (NYSE) and the Tokyo Stock Exchange (TSE).

UBS has more Institutional Investor ranked analysts than any other firm and is a leading provider of research on companies, industry sectors, geographical markets and macroeconomic trends. UBS Research covers more than 3,300 companies globally, representing 85% of the world’s market capitalization.

About GovernanceMetrics International

GMI’s research universe encompasses 4,200 companies worldwide, including more than 600 from emerging markets. GMI’s rating system incorporates hundreds of data points across six broad categories of analysis: board accountability, financial disclosure and internal controls, executive remuneration, shareholder rights, ownership base, takeover provisions, plus corporate behavior and social responsibility. Companies are rated relative to others on a scale of 1.0 (lowest) to 10.0 (highest). Subscribers to GMI are able to view a company’s overall rating, section ratings, red flags (issued by GMI from time to time to highlight specific characteristics that present notable cause for concern) plus several pages of written analysis.

GMI clients include leading investment managers, pension funds, banks, insurance companies, credit rating agencies, stock exchanges and professional service firms throughout North America, Latin America, Europe and the Asia-Pacific region. Please see www.gmiratings.com for additional information.

For UBS Inquiries: US: Kelly Smith of UBS at +1-212-882-5699

UK: Richard Morton of UBS at +44 20756 80175

New York — Investment strategy advice, already one of the most popular forms of investment research, stands to gain more converts as a result of the current crisis according to Integrity Research, a specialist research firm covering the investment research industry.

In its latest edition of ResearchFocus℠, which reviews key segments of the research industry, Integrity identified thirty-seven independent investment strategy firms, up from seventeen firms ten years ago. “Like macro hedge funds, strategy firms thrive in this kind of environment” says Michael Mayhew, Integrity’s chairman and co-author of the study. “Going forward it’s going to be a tough environment for investment research generally but strategy firms will fare better than most other types of research.”

Investment strategy firms, which provide portfolio-level recommendations as opposed to security-level analysis, comprise less than 25% of economic research firms in terms of the number of firms yet they have a 44% share of revenues for the economic research category according to Integrity Research.

The majority of investment strategy firms use macroeconomic analysis as the basis for their strategy recommendations. “An increasing number of strategy firms draw on methodologies outside of economics,” says Nathan Bragg, research analyst and co-author. “Some of the more innovative firms are drawing on external experts or applying social networking technologies. Investors like new investment ideas and are increasingly willing to find alternative sources for those ideas.”

Integrity surveyed over 180 hedge funds and long only investors to better understand how they use investment strategy, which strategy firms they prefer, and why. The survey was used to help evaluate the firms, and also to understand the dynamics of the investment strategy segment itself.

Integrity selected 2008 Top Picks for Investment Strategy in four categories: Macro, Hybrid, Alternative-based, and Thematic. Evaluations of the research providers are based on inputs from institutional investors and Integrity’s own assessments.

Integrity’s 101-page ResearchFocus℠ report includes comparative analysis of investment strategy firms, results of Integrity’s survey of buy-side users of investment strategy, discussions of the top investment strategy firms, and reports on each of the thirty seven strategy firms.

The report is used as a “buyers guide” by research directors and analysts at institutional investors. For additional information on the current edition of ResearchFocus℠ go to http://www.integrity-research.com/cms/isreport or contact Matthew Bannister at 212.845.9088 x6851.

About Integrity Research
Integrity Research Associates, LLC is an information and solutions provider specializing in the investment research industry. Its institutional investor clients use Integrity’s services to find new research providers and monitor existing ones. Integrity ResearchSelect® provides confidential, customized searches tailored to investors’ requirements. Integrity covers over 1,900 research firms in the U.S., Europe and Asia. Additional