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 20th, 2009 Barack Obama was inaugurated as the 44th 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.