Big Picture Research


When Integrity Research conducted a survey of investors in the second quarter of this year, nearly half said they use research from independent investment strategy firms.  We suspect the other half have since reconsidered.  The third quarter gave a brutal demonstration of how important it is to get the big picture right.

Even with usage at the 50% level, investment strategy is one of the most prevalent types of research.  In our forthcoming ResearchFocusSM report on Investment Strategy, which will be released later this week, we review 37 alternative firms specializing in investment strategy.  As part of the review we found a great diversity of investment views, methodologies and geographic expertise.

We define investment strategy as research providing portfolio-level recommendations as opposed to security-level recommendations.  We categorize investment strategy research as a component of the broader economic research category, but unlike economic research firms generally, strategy firms tend to provide actionable advice rather than economic commentary.  The advice can take the form of allocation advice at the asset, geographic or sector levels.

Reflecting the importance of investment strategy, the number of independent strategy firms has quadrupled from 8 in 1988 to 37 in 2008.  Strategy firms are the most popular segment of economic research, based on investor spending.   Investment strategists comprise less than 25% of economic research firms in terms of the number of firms yet they have the largest share of revenues for the economic research category.  We estimate 44% of the total amount spent on economic research goes toward investment strategy research.

The majority of investment strategy firms draw on macroeconomic analysis as the basis for their strategy recommendations.  Of the 37 firms reviewed, 21 use macroeconomic methodologies.  An increasing number of firms draw on alternative methodologies, including technical analysis, quantitative models, analysis of money flows, access to experts or even social networking.  There are nine firms which use a hybrid of macroeconomic analysis with other techniques, and these firms have captured a significant share of the investment research spending.

One of the most highly valued aspects of investment research is thematic research, which focuses on recommending ‘big picture’ investment themes. In Integrity’s survey of investors, thematic research was identified as the most valuable strategy component.  Thematic research can be generated from a variety of sources and methodologies, including macroeconomic analysis, demographic trends, tax policy, geopolitical developments, inflation or even climate change.

Investment strategy firms have also diversified beyond the U.S.  Nearly half of the firms reviewed are located outside the U.S.  7 strategy firms are based in Europe, 7 in Asia and 2 in Canada.  There is also a greater degree of geographic specialization, with strategy firms focusing on recommendations for allocations within specific regions, whether Europe, Asia or emerging markets.

For this review, Integrity surveyed hedge funds and long only investors to better understand how they use investment strategy, which strategy firms they prefer, and why.  We used the survey to help us evaluate the firms, and also to understand the dynamics of the investment strategy segment itself.  Investment strategy is a relatively mature category which benefits from the increasing value placed on macro-level analysis as a result of the liquidity and credit crisis of 2008.  One proxy for this is the relative outperformance of macro-oriented investment funds.  Nevertheless, the post-crisis outlook for investment research generally is challenging, with declining commissions spending, fewer asset management clients (particularly hedge funds) and fewer buy side analysts.  Some of the larger strategy firms rely on the broker vote for payments, making them particularly vulnerable to the upcoming declines in commission payments.

We evaluated the 37 investment strategy firms reviewed in the ResearchFocusSM review on five different metrics: customer satisfaction, analytical resources, cost versus satisfaction, popularity, and Integrity’s qualitative assessment of the research produced by each firm.  Based on its evaluations, Integrity selected 2008 Top Picks for Investment Strategy.  Each Top Pick is chosen from a specific type of investment strategy: Macro, Hybrid, Alternative-based, and Thematic.  In some cases, firms were eligible to be selected in more than one category.   We also highlight new and interesting firms which have developed novel approaches to investment strategy, or are firms to watch.

While we can’t reveal which firms are our top choices, we can highlight some of the independent strategy firms which accurately warned their clients of the impending liquidity crisis and deleveraging.  For example, David Roche’s Independent Strategy Ltd., has been cautioning about deleveraging risk since 2006.  Steve Leuthold’s Leuthold Group was labeled a ‘perma-bear’ for its longstanding negativism before turning bullish in August–a bit too soon by his own admission.  Marc Faber’s Gloom, Boom and Doom report was a critic of Greenspan’s Fed policies, long before it became fashionable.  Peter Bernstein’s Economics & Portfolio Strategy provides exceptional market perspective, reflecting his long experience as a market historian.  These represent a few of the different strategy firms that investors value for their provocative insights.


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