New York – Susquehanna Financial Group, LLLP (SFG), an institutional broker-dealer member of the Susquehanna International Group of Companies (SIG), announced recently that it has hired A.J. Rice as its senior analyst and Chris Rigg as its associate analyst covering Healthcare Services. These hires broaden SFG’s coverage of the healthcare sector

Most recently, Mr. Rice has been an independent research provider for Soleil Securities. Mr. Rice was recognized by Institutional Investor and Greenwich Associates as being among the top analysts covering healthcare facilities for a ten year period. He has been the analyst for 16 managed initial public offerings and public offerings for 28 other companies. Mr. Rice has covered 26 sub-segments of the healthcare industry, including healthcare providers, medical devices and equipment, managed care, distribution and death care. During his 23 years in the industry, he has worked for several top Wall Street firms, including Merrill Lynch; Bear, Stearns; CS First Boston; and J.P. Morgan. Mr. Rice earned his BA in economics from the University of Virginia and his MBA in finance and accounting from Columbia University, where he is a guest lecturer for the graduate school of business.

Prior to joining SFG, Mr. Rigg was also an independent research provider with Soleil Securities. Previously, Mr. Rigg worked for CIBC Capital Partners as a director in the healthcare venture group. Earlier in his career, Mr. Rigg worked for Merrill Lynch as a fundamental equity research analyst. He began his career at CIBC World Markets as a financial analyst in the healthcare investment banking group. Mr. Rigg earned his BA in business administration and history from Muhlenberg College and his MBA from New York University.

New York – Guidepoint Global, a provider of primary research and a well-established expert network, launched its Genetic Disorder Tracker, a new data service covering commercial trends on the treatment of eight rare genetic disorders.

Guidepoint Global covers various industries including technology, media, and energy, among others. The company’s cross-industry coverage benefited from its acquisition of Vista Research last May. However, Guidepoint’s traditional strength has been its coverage of the healthcare industry. The Genetic DisorderTracker is the 28^th service developed by Guidepoint Global covering select medical technology and therapeutic industries.

The new service releases data on a monthly basis. It aggregates the usage of about a dozen therapies reported by a clinical sample of over 100 sites globally. The service collects data on volume, market share, drug penetration rates, therapy-switching, patient activity, and the geographically-stratified performance of leading company participants.

The company participants include Genzyme, Shire, BioMarin, Merck Serono, Actelion, Pfizer, and Protalix, among others. The rare disorders covered by Genetic Disorder Track are: Gauche’s disease, Fabry’s disease, PKU, MPS I (Hurler Syndrome), MPS II, MPS VI (Maroteaux-Lamy Syndrome), niemann=Pick disease, and Pompe disease.

New York – Riddle me this: Why are alternative research firms adding trading desk capabilities while commission sharing arrangements, which allow investors to trade with one counterparty and pay for research from a different counterparty, continue to grow?  Answer: persistent misunderstanding of soft dollars on the part of pension funds and other asset manager clients.

Commission sharing arrangements (CSAs, also known as Client Commission Agreements or CCAs) have been growing for two main reasons.  Initially, they appealed to investors as a vehicle to reduce the number of trading counterparties.  More recently, they provide a mechanism to reduce commission expense by converting full service commissions (4-5 cents per trade) to cost-plus trading (typically half the cost of full service).

The paradox is that although usage of CSAs is growing, so is the popularity of trading desks for alternative research firms.  Firms such as IRC Securities offer the ability for research boutiques like Meredith Whitney Advisory Group and Zelman and Associates to offer investor clients direct trading execution.   When CSAs first began to be broadly adopted in 2006, the predictions were that trading desks would become less necessary and less widespread, but that doesn’t appear to be the case.

We have speculated in the past that the markups by CSA brokers may be an answer to this paradox.  Although CSAs/CCAs save money on full service commissions, they are still a more costly payment mechanism for investors than direct trading.

We recently met with an asset manager which provided another clue to the paradox.  The asset manager has about $1 billion in long/short and short only, and another $2 billion in long only.  In talking to the analysts, they complained that they found it hard to pay for boutique research, even though they find significant value.  Further conversations with the president of the firm revealed the cause.  Pension clients, and pension consultants, scrutinize the firm’s ’soft dollar’ payments, defined as step out payments to third parties and CSA payments.  The firm has limited commission payments for third party research to 15% of the firm’s commission pool.

The irony of this is that the Securities Exchange Commission clarified in 2006 that soft dollars relates to all commissions paid for research, including bundled commissions paid to bulge bracket firms.   Nevertheless, mutual fund trustees, pension funds and pension consultants continue to zero in on only the unbundled portion of soft dollars: step out payments for third party research and CSAs.  Why?  Because payments to third parties are easier to monitor than bundled research, even though they are a fraction of the commissions spent to purchase research.

So, a proliferation of trading desks continues.  One of the objectives of regulators is best execution, but until regulators address both sides of the commission equation–best research and best execution–this goal will be elusive.

New York, NY – A number of events have occurred in recent years which have made the actions of those in government critical for investors to follow if they wish to be successful.  On January 20^th, 2009 Barack Obama was inaugurated as the 44^th president of the United States, and with his inauguration investors started to wonder what the implications of legislation he would attempt to pass would have for the financial markets. 

The obvious development which prompted swift government reaction was the credit crisis sparked by the failure of Lehman Brothers, and the troubles experienced by FNMA, FHLMC, AIG, Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup and the Bank of America, to name just a few.  Governmental reactions to this credit crunch across the world had (and continue to have) large implications for the investment community. 

Research firms capable of predicting both the probability and the implications of government legislation are nothing new, although investor interest in this type of research certainly has grown in the past few years.  In fact some of the first policy research firms came into existence in the late 1950’s and early 1960’s. 

Integrity’s proprietary methodology defines a policy research firm as a firm which provides research that analyzes legislative or regulatory initiatives which will impact the securities markets.  Typically firms providing policy research have analysts in Washington or other government centers who are available to investors to answer questions about recent developments.  Firms could focus on macro tax issues or specifically on certain industries. 

Investors typically receive policy research from either sell-side investment banks, or from boutique “alternative research” providers who specialize in producing and selling this type of research to institutional investors.  According to Integrity’s ResearchSelect database, we have identified 34 alternative research firms that we would categorize as “policy research” providers.

Besides policy research firms, Integrity has identified firms providing “political intelligence” services.  Integrity defines political intelligence providers as lobbyist, law, or accounting firms which utilize their knowledge of political or regulatory developments to advise investors about the likelihood and timing of these developments. 

In recent years, lobbying firms, law firms, or accounting firms have ramped up their “political-intelligence” units, and charge hedge funds between $5,000 and $20,000 a month for tips and predictions.  Through a variety of sources, Integrity was able to identify 15 providers of political intelligence.  As we have stated, providers of political intelligence are those firms whose primary business lies outside of providing research yet enables these firms access to information relevant to institutional investors. 

To better understand investors’ use of policy research, Integrity Research Associates conducted a market research survey of 357 buy-side participants during the third quarter of 2009 on this topic.  Of this total, 127 investors (or 35.6%) explained that they currently use policy research as a part of their investment process.   

Integrity asked respondents how important policy research was to their overall research process.  The majority of respondents answered that policy research was “somewhat important” to the overall research process but it is worth noting that 27% of respondents rated policy research as either “very valuable” or “critical to my research process” while only 14% rated policy research as “not to valuable” or “not at all valuable”. 

Integrity also asked these survey participants the value of boutique policy research when compared to policy research obtained from investment banks.  Fifty four (54%) of respondents saw more value in independent research while only 4% of respondents saw less.  The reasons behind this preference could be numerous.  Perhaps the types of networks necessary to produce meaningful policy research are not easily created by the type of analysts who work at investment banks.  It is also possible that in the current economic climate, investment banks have cut down on the volume of policy research they provide.

Integrity Research Associates plans to publish a detailed ResearchFocus report on institutional investors’ use of policy research in the coming weeks which will present a complete analysis of the findings of our survey, reveal some of the more prominent “political intelligence” providers we have discovered, and identify the top policy research providers according to the buy-side.

BNY ConvergEx’s Jaywalk recently announced the second half of the 2009 independent research provider performance awards.  Jaywalk  presented awards in 5 different categories-  Best Bullish Calls; Best Bearish Calls; Best Overall Performance; Best Performance in the Energy Sector; and  Directors Choice Awards. The winners in each category were the following:

Best Bullish Calls

PriceTarget Research

Green Street Advisors

Best Bearish Calls

Columbine Capital Services

REIT Growth & Income Monitor

Best Overall Performance

Jefferson Research & Management

Green Street Advisors

Best Performance in the Energy Sector

La Jolla Economics

BOE Research Services

Director’s Choice Award

Sabrient Systems LLC

The nine awards were chosen from approximately 150 providers on the Jaywalk Platform. The awards were calculated on metrics which focused on the degree to which each research provider’s equal-weighted portfolio of Buy/Positive ratings outperforms their equal-weighted portfolio of Sell/Negative ratings.  These performance statistics were calculated by Abacus Analytics, a quantitative consulting firm serving the brokerage and investment management communities, using data from July 2009 through the end of December 2009.

Chief Executive officer of ConvergEx Research Solutions stated, “The equity markets in the second half of 2009 remained challenging and often unpredictable so we are pleased to recognize these outstanding IRPs whose unique perspectives allowed them to foresee future trends and anticipate market shifts.”

New York – Businessweek is reporting that another top ranked analyst from a bulge bracket firm has left to form an independent equity research shop.  This time the analyst is Jeffrey Sprague, formerly of Citigroup Inc.  Mr. Sprague cited the feeling that Wall Street should go back to its roots and “create a new culture of small firms with partners that have skin in the game” as his reason for leaving Citigroup.  He also feels that the focus should be more on the clients.

Mr. Sprague will be joined by Nicole Parent, formerly of Credit Suisse Group AG in forming their new research firm, Vertical Research Partners LLC, which will be based in Stamford, CT.  Ms. Parent left Credit Suisse in April of 2009 and feels that larger firms “are far more bureaucratic today, and they’ve lost sight of the fact that what’s important is the client”.

Research at the firm will be headed by Mr. Sprague and the firm will cover 16 companies to begin with, including such names as General Electric Co. and 3M Co.  The firm is expected to have coverage up and running in six to eight weeks and has plans to expand its coverage to over 20 names in capital goods and to add teams covering industries such as aerospace, materials, and machinery in the future.

Mr. Sprague and Ms. Parent have worked together in the past, when Ms. Parent worked on Mr. Sprague’s research team from 1996 to 2000.  Ms. Parent will not have any research responsibilities at Vertical Research but will instead be focused on running the day-to-day operations.

The move by Mr. Sprague is part of an ever increasing trend which Integrity Research is following closely.  One does not have to look very far into our archives for similar stories as just over a week ago, Integrity wrote about how Francois Trahan recently left ISI for a job at independent firm Wolfe Research.

New York – Recent analysis of risk measures has proven Audit Integrity to be better than a number of academic risk measures. In addition, academic analysis which ranks commercial governance rating services also concludes that Audit Integrity is the best of the services analyzed.

Nine academic papers conclude that Audit Integrity outperforms both academic analysis–Sloan, Beneish”s M-score and Dechow et al’s F-Score, and others–and commercial ratings services. A synopsis of the most recent two papers is below:

•  Detecting and Predicting Accounting Irregularities: A Comparison of Commercial and Academic Risk Measures (Feb 2010), Price, Sharp, Wood
  • We find that AGR outperforms academic risk measures in all head-to-head tests for detecting and most head-to-head tests for predicting Securities and Exchange Commission enforcement actions (AAERs), egregious accounting restatements, and shareholder lawsuits related to alleged accounting improprieties
• Rating the Ratings: How Good are Commercials Governance Ratings? (Sep 2009), Daines Gow Larker
  • This study demonstrates that Audit Integrity has statistically significant results at the 1% level of confidence in predicting Stock Performance, Class-Action Suits, Restatements and Operating Performance.  This compares favorably with other commercial services.

 That the results across 9 academic papers all identify Audit Integrity as the top performer, despite the type of comparisons used, all point to outperformance by Audit Integrity is overwhelming evidence that points to the strength of this product. The individual papers can be reviewed on the Audit Integrity web site.

New York— A coalition of investors from 13 different countries is calling on 86 major companies for enhanced corporate reporting on environmental, social, and governance (ESG) activities, according to a press release issued by the United Nations Principles for Responsible Investment (UN PRI) last week. The lack of appropriate reporting from corporations presents an important opportunity for independent firms offering ESG research to investors.

The coalition of global investors, managing over US $2.1 trillion of assets, believes that ESG issues affect the performance of investment portfolios. These investors subscribe to the UN PRI, six principles geared toward responsible investment, and take into account ESG issues in their investment activities. Therefore, corporate reporting, as well as independent ESG research, is vital to these professionals.

Corporate failure to comply with reporting requirements

Each one of the 86 companies addressed by the investor coalition voluntarily joined the UN Global Compact, a global corporate responsibility initiative that requires its members to issue annual reports indicating their compliance with the UN sustainability framework. The 86 companies called on by the investor coalition have failed to honor the annual reporting requirements they accepted when joining the initiative.

The UN PRI has not disclosed the names of the 86 non-reporting companies, but it hopes that the investors’ call will motivate them to submit their reports. Last year, the investor coalition “named and shamed” 105 incompliant companies, resulting in appropriate reporting from 50 out of the 105 companies called upon.

Corporate reporting on ESG – an opportunity for independent research providers

The investor coalition fears that companies are increasingly subscribing to the UN Global Compact as a standard of good ESG practice, but are failing to fulfill the main goals of the initiative. Independent research covering ESG issues can address this issue twofold: On the one hand, indies can offer coverage on non-reporting companies. On the other hand, independent research can corroborate the accuracy of the statements submitted by reporting companies.

Integrity Research has reported on the significant developments in the ESG research space. Consolidation is the trend, and further changes can be expected – for example, who will buy Riskmetrics?.  Among all these movements in the research industry, one thing is certain at this point: ESG issues and research continues to gain visibility among regulators (such as the SEC), corporations, and global investors. Local and international regulations tend to make it a necessary tool and investors will benefit from enhanced independent ESG coverage.

Singapore – The Securities Investors Association of Singapore (SIAS) is collaborating with NRA Capital to provide free, issuer-sponsored research reports to the public.

The companies being studied will have to pay a fee under a program called the SIAS-NRA Corporate Initiated Research (SNCIR). The program, administered by SIAS, will produce analysis reports with investment calls on companies. It will also give the public free access to investment seminars every quarter. SNCIR has signed up 14 companies since November 2009, and expects to add 20 more over the next few weeks, reaching 80 to 100 covered companies within the next 12 months.

Some steps are being taken to preserve independence: Companies can choose to have either SIAS Research or NRA Capital or both houses conduct the research; however, if they choose just one, the management committee of the program will assign either SIAS or NRA Capital to research the company. This decision on allocation of the company to the research provider is final. The committee will also deal with disputes and complaints.

The London Stock Exchange announced a similar scheme in partnership with IIIR in 2008, and NASDAQ OMX signed a deal with Morningstar to provide issuer-sponsored research earlier this year.

New York – Morningstar, a provider of independent investment research, announced its acquisition of Footnoted.org, a research firm founded in 2003 by business journalist Michelle Leder with the goal of scrutinizing SEC filings and uncovering facts relevant to investors.

The terms of the transaction were not disclosed but Footnoted’s Leder declared “I came up empty-handed” –  alluding  to the extravagant terms that characterize some M&A deals. According to Ms. Leder, neither she nor Morningstar believe in what she calls “crazy perks” commonly seen in M&A deals. Instead, Ms. Leder expresses that her reward from the deal will come if she is able to grow Footnoted according to her expectations.

Footnoted.org will become Footnoted.com, but will continue its normal operations from its headquarters in Peekshill, NY. After the acquisition, Footnoted is planning to hire new staff in order to grow both the free and subscription-based aspects of the business.

Morningstar continues to expand by acquiring businesses that add value to its existing platform. Integrity Research has covered some of Morningstar’s acquisitions. Some of this firm’s recent acquisitionsinclude:

2007 – fund data business of S&P’s.

2008 – Fundamental Data Limited, a provider of data on closed-ends funds in the UK.

2008 – Hemscott’s, a data, media, and investor relations web site business.

2008 – Tenfore Systems, a provider of real-time market and financial data based in the UK.

2008 – 10 K Wizard, SEC filings research and alert services.

2009 – Logical Information Machines Inc., provider of market pricing data and other data-management services.

2009 – Andex Associates – Financial communications materials provider in Canada

2009 – equity research and data business of C.P.M.S.- Computerized Portfolio management Services Inc.

2009 – global financial fillings database business of Global Reports LLC.