JPMorgan’s deals on Strategas’ measure of lobbying reveal policies, influence as key to alpha

By Emma Trincal

New York, March 16 – JPMorgan’ issuing arm will price two note offerings tied to an innovative basket based on the idea that dollars spent on government lobbying may improve a company’s bottom line. At least, if the money is well spent.

JPMorgan Chase Financial Co. LLC plans to price two separate offerings of notes both due April 9, 2018 and linked to a basket of 50 common stocks selected by Strategas Research Partners as having the highest lobbying intensity, according to 424B2 filings with the Securities and Exchange Commission.

Strategas Research Partners is a New York registered broker-dealer and advisory firm founded in 2006.

“We’ve licensed the basket to JPMorgan,” Gus Demopoulos, managing director, head of origination and syndicate at Strategas Research Partners told Prospect News.

“This is the first time the basket is used in a structured note.”

Proprietary model

Using its proprietary methodology, Strategas selected stocks of 50 companies in the S&P 500 index that had the highest lobbying intensity score as of the most recent quarterly evaluation, which was Feb. 27.

Strategas calculates lobbying intensity as a measure of the total dollar amount spent on lobbying activities by that issuer on a year-to-date basis relative to the size of the issuer.

In the offering documents, JPMorgan noted: “Companies often use lobbying to position themselves before a shift in public policy or to fend off challenges to their business models, both of which can impact the earnings of these companies.”

But the outcome of lobbying is what matters for Strategas.

“We filter companies that are benefiting from the lobbying spent,” said Demopoulos.

“Historically, the spent on that investment has resulted in outperformance. We backtested the last seven years and we found that our selection has outperformed the S&P 500 in excess of 300 basis points.”

Steve Doucette, financial adviser with Proctor Financial, said it was an “interesting” idea.

“Backtesting is always good. But is seven years good enough? It’s after coming out of the financial crisis.”

Secret word

The research firm does not select companies that spend the most money on lobbying but rather those whose spending efforts yield what Strategas calls a high lobbying “intensity.”

Demopoulos declined to be more specific about the definition of the word “intensity” or what this metric measures exactly, arguing that the concept was at the core of the firm’s proprietary model.

Broadly defined, the amelioration of a corporation’s bottom line would be the desired outcome of “intensity.”

Size

The prospectus explains that Strategas’ assessment of the impact of lobbying is adjusted for the size of the company.

Strategas calculates lobbying intensity as a measure of the total dollar amount spent on lobbying activities by that issuer on a year-to-date basis relative to the size of the issuer, according to the filing.

A company could spend billions, which may not yield sufficient impact to be picked up by the model, explained Demopoulos. Separately, another corporation could spend much less and generate proportionally higher rewards.

Once a first selection of the top 90 companies with the highest “intensity” is made, the model ranks them and picks the top 50, he explained.

“We are sector neutral” said Demopoulos.

“We look at the impact on the assets, not the absolute spent.”

The intensity factor adjusted to size explains why some of the largest companies in sectors where lobbying is significant may not necessarily score best on the scale applied by Strategas, according to an analysis of the components’ sectors run by Prospect News.

For instance, no bank appears in the portfolio. Only two non-bank financials, CBOE Holdings Inc. and S&P Global Inc. have been selected to represent the entire financial sector, a meager 4% of the basket.

Each basket component has a 2% weighting.

“Banks, it’s not a secret, spend a substantial amount of money in lobbying but they may not generate as much traction as someone else.”

The “someone else” could be the industrial sector, the No. 1 sector, which makes for 30% of the weighting in 15 stocks.

Within this sector, the top industry is defense. Six of the 15 industrial picks are stocks of big defense companies, such as Lockheed Martin Corporation, Northrop Grumman Corporation, General Dynamics Corp. and Raytheon Co.

Sectors

The next most represented sectors were consumer discretionary, healthcare and technology, each representing a 14% weighting as well as materials, with a 12% weighting. Energy and utilities were a minority in the basket with only one company in each sector: Occidental Petroleum Corp. in the energy sector and the Southern Co. in utilities.

Consumer Staples were mid-range with three stocks only. Interestingly two of these were tobacco companies: Altria Group, Inc. and Philip Morris International Inc.

Great strategy, bad idea

“This idea that you’re benefiting from spending on lobbying is a great investment theme to follow. If you can make 3% more than the market, it’s a good strategy,” said Doucette.

“But it shouldn’t be that way. Somehow I don’t want to invest in companies that have figured out how to manipulate the system.

“I started my career in the military and it’s truly amazing how the lobbyists and Congress influence strategic initiatives more than the Department of Defense. It should be the other way around.

“It probably makes sense to follow that theme. But I’m not going to spend the time to do my due diligence and research because I don’t like the theme.”

New baskets coming

Strategas is working on a series of other policy-based portfolios.

“We’re talking to other issuers for other baskets,” he said, adding that those would be used for structured products.

Strategas, which was founded in 2006, has developed managed strategies for family offices and ultra and high net worth advisors.

“We just started our capital market business in the past year, Demopoulos said.

Demopoulos said the firm is “politically agnostic.”

But a few of the upcoming baskets appear to have been designed to take advantage of some of the pro-growth policies announced by president Donald Trump.

“We’re launching a repatriation basket, an infrastructure basket, a health basket and a BAT basket,” he announced.

The repatriation basket will select the stocks of multinationals expected to profit from Trump’s tax cuts designed to encourage U.S. companies to repatriate funds held overseas back to the United States.

The infrastructure and the health baskets will screen companies set to benefit from regulatory changes.

The so-called “BAT” basket, which stands for border-adjustment tax, will screen companies the most likely to benefit from the House Republicans’ proposed tax on imported goods.

Two deals

JPMorgan Chase Financial Co. will price a capped buffered equity notes offering. The notes at maturity will pay par plus any index gain, up to a 12% to 15% cap. Investors will receive par if the index falls by up to buffer amount of 10% and will lose 1.111111% for each 1% decline beyond the buffer. The Cusip is

Separately, JPMorgan Chase Financial Co. will price a second offering of return notes linked to the Strategas Policy Basket. The issuer in this product removed the cap and the buffer. Instead, investors will receive par plus 98.70% to 99.15% of the return of the basket, which may be positive or negative.

The adjustment factor allows the issuer to uncap the product. The tradeoff, however, is the loss of the buffer as well as reduced gains and magnified losses.

The notes in both offerings will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

Both deals will price on March 28 and settle on March 31.

The Cusip on the capped buffered deal is 46646QV28.

The Cusip on the second is 46646QU86.

© 2015 Prospect News.
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