The slow release of audited financial information from states and local governments has been a long-standing defect of the municipal market. Municipal analysts are challenged to make credit decisions in real-time, while using financial data that is woefully outdated.
How is a municipal bond investor supposed to properly gauge the credit quality of an issuer today using a financial report that is nine months old, with no interim quarterly statements, and postings of tax receipts that are months behind?
To contend with this problem, investors need financial, demographic, and economic data that has greater frequency, daily or weekly, than the standard publicly available datasets, which are monthly or quarterly. They also need datasets that meet the unique needs of the municipal market. Fortunately, the development of the market for alternative datasets has exploded during the COVID pandemic.
The availability of proprietary datasets, and the advancement of predictive analytics, allows investors to expand their field of vision beyond what is available from the traditional data the market has relied upon for decades.
Investors who want to quantitatively model the path of a state’s sales tax collections during periods for which there is no data can use alternative data and predictive analytics to fill in these data gaps so common to the municipal market. Investors who make the leap toward greater use of alternative data will find that the quality and accuracy of their credit assessments will benefit from the use of alternative data when used in place of subjective or qualitative guesswork.
With the explosion in alt data, many intermediaries have formed to make available all manner of data to clients. Eagle Alpha, a Dublin-based global leader in alternative datasets, represents over 1,000 different vendors of data. The granularity of these datasets is amazing. One of Eagle Alpha’s vendors has a dataset made up of the building specs — lot size, building size, number of floors, etc. — for every single building in the United States.
Another vendor provides demographic and financial detail for every single individual migration. Instead of struggling with annual data, this dataset gives muni analysts daily data on the critical demographics and finances of migrators that illuminates the buying power lost or gained based upon the actual incomes of the people moving in or out of a jurisdiction.
Previously, analysts worried about net migration in terms of numbers of people, since that was all that was previously available, and not on the individual incomes associated with the movement of those people. This is critically important because for any given city, a net population loss might actually result in an increase in net buying income, rather than the loss that was automatically assumed.
When data is not available, data can be created using a variety of tools. Using Social Media Analysis, I was able to monitor the sentiment of Illinois voters leading up to last year’s Fair Tax Amendment vote. Since public opinion polling on the Fair Tax was stopped six months before the November general election, having this proprietary tool at my disposal was very valuable. To accomplish this, I used a web query, gathered all mentions of the Fair Tax coming from IP addresses located in Illinois and separated the data into three baskets: For, against, and unclear.
A portfolio manager’s total return is composed of the market return, the beta, and the unique value provided through portfolio management, the alpha. Portfolio managers seek alpha to provide unique value. Investors should consider how you can add alpha when everyone is using the same outdated data that you are? Since the data is the same, the investor can add value only to the extent that their interpretation of the data is more accurate than their competitors. There may be many ways to add alpha, but the best way to create a lasting alpha advantage is through the creation and use of alternative and real-time data sets that confer unique, ongoing advantages to the user only.
Alternative and real-time data enables investors to create their own unique intellectual property that provides ongoing competitive advantage. Using alternative data and predictive analytics, your metrics, your indices provide benefit that accrues only to you. This is a source of alpha that your competitors do not have access to.
The municipal market appears to be a late adopter of quantitative techniques involving alternative and real-time data, and predictive analytics. Perhaps the sheer heterogeneity of the municipal market — the huge numbers of issuers and the enormous range in size — has been a factor in slowing the adoption of these tools, which are widely used in the equity and corporate bond markets. In fact, alt data is already very widely used in retail, finance, government and other sectors of the economy. Investors in corporate bonds use it to understand what it is that is driving production, hiring, and investment decisions. The Orlando Magic use alt data and predictive analytics not only to optimize revenue, but also to support decision-making regarding the selection of their starting lineup.
In time, there will be a separation of investors who understand and use alternative data from those who stick with traditional datasets as the basis of their credit decisions. Competitive pressures will drive the adoption of predictive analytics using alternative datasets. Municipal investors should be alert to the changes coming, and should seek to embrace them, or be left behind.