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Corporate lobbying is often criticized for allowing powerful corporations to exert undue influence on the democratic process. But if it works, small investors will now be able to at least get their share of the loot.
New York-based Strategas Asset Management has unveiled an exchange-traded fund designed to leverage companies’ efforts to increase profitability by lobbying the US federal government.
Dan Clifton, head of policy research and lead portfolio manager at Strategas Global Policy Opportunities ETF (SAGP), said the launch was aimed at capitalizing on the fact that the United States is experiencing “the most politically volatile period since the end of the civil war, with the ruling party having changed in seven of the last eight election cycles.
“One year it’s tax cuts or health care reform, then it’s gone. Companies are now saying they are at greater risk to their business from Washington than other risks,” Clifton added.
“They understand that they have to be at the table as part of the process in Washington. We believe these companies have an earnings advantage over other companies. »
The ETF will build on Strategas’ existing political opportunities portfolio, which is only available to institutional investors through separate accounts.
However, while this strategy focuses only on US large and mid-cap stocks, the SAGP also encompasses small caps and non-US companies.
Clifton argued that smaller companies can make more money from lobbying than larger ones, which may have to spend on lobbying each year as a form of “maintenance”, around issues such as workers’ rights and healthcare. health.
“Small businesses see this as an R&D expense. They say “we’re going to get a feedback on that”. Small and mid-caps performed tremendously when it came to backtesting. This is the first time we’ve incorporated this style,” Clifton said.
Annual lobbying spending in the United States has averaged $3.5 billion in recent years, according to Statista, with the pharmaceutical, electronics and insurance sectors having the largest spending.
However, rather than total spend, the SAGP weights companies based on their “lobbying intensity,” taking into account their size.
“Yes [the weightings] were simply calculated on the basis of lobbying expenditures, we would have Amazon, Google and AT&T. None of these companies are in the basket. We need to find businesses where profits benefit [from successful lobbying] would be the best,” Clifton said.
The initial portfolio is made up of pharmaceutical and biotechnology companies, such as Japanese Astellas Pharma, German Fresenius Medical Care and American Biogen. But it also includes beverage companies Brown-Forman and Diageo; tobacco giants Altria Group and Philip Morris International; and fast-food vendors such as Domino’s Pizza and Yum Brands.
Defense stocks, such as Lockheed Martin, General Dynamics and BAE Systems, are also well represented.
Clifton cited successful efforts by biotech companies to help water down proposals to lower prescription drug prices as an example of SAGP’s investment thesis.
The portfolio of preexisting political opportunities has performed disappointingly in recent years, undervaluing the S&P 500 every year since 2018.
Clifton attributed this in part to his sector leanings, namely his low exposure to tech stocks and overweight to pharma and defense, which have not been helpful in recent years.
He also cited geopolitical obstacles that frustrated efforts by lobbyists to limit the impact of President Donald Trump’s trade tariffs in 2018.
The ETF’s thesis may, however, raise eyebrows. “If corporate lobbying expenditures can be associated with excess profits, I think that raises questions for that particular company or industry,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar.
Nonetheless, Lamont said it was “not the only ETF to have strayed into a moral or ethical gray area”, citing the BAD ETF, which invests in gambling, alcohol and drugs, as another example. .
Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research, said that despite some people’s belief that “government policy should be conducted on behalf of people without commercial interests,” he doesn’t believe that most investors or Americans in general considered the practice unethical.
Rosenbluth alluded to the Democratic Large-Cap Core Fund (DEMZ) and the Point Bridge GOP Stock Tracker ETF (MAGA), which invest in companies supporting Democratic and Republican candidates, respectively, but added that the SAGP was at least playing tricks. two sides of the aisle, so you don’t have to be politically affiliated with either to invest in it.” In addition, he offered a portfolio “that you won’t find anywhere else”.
Still, Nathan Geraci, president of ETF Store, a Kansas-based financial adviser, said SAGP’s challenge “will be to overcome any perception of partisanship or political ties.
“Corporate lobbying inevitably becomes intertwined with politics and can therefore sometimes become emotionally charged. Most advisors prefer not to mix policy with portfolios for this reason. »
Geraci also noted that the ETF EventShares US Legislative Opportunities ETF (PLCY), which focused on stocks its managers thought would gain from changes in government policy and regulation, closed in August 2020 with assets of just $23 million.
“Ultimately, the success of this ETF will hinge on performance and marketing itself as entirely politically neutral,” he added.
Clifton said he could “understand people would say this is bad, this is dirty”, but defended both corporate lobbying and his fund.
“The beauty of the American system is that everyone is involved. NGOs, trade unions . . . I would say there might be more power on that side than on the corporate side,” he said.
“We believe in lobbying. This helps to avoid errors. If you are not at the table, you will be on the menu.
As for the SAGP, “we don’t make the rules,” Clifton said, “we just figured out there was alpha there.”
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