Securities, Commodity Contracts, and Other Financial Investments and Related Activities
(NAICS Industry 523) consists mainly of the specific investment-related activities and employment from worksites in the State. These include stock, bond, and commodity brokering, trading, and exchanges; investment banking; venture capital and investment clubs; portfolio management, including private equity investment, certain trust management and grant making, pension fund management, mutual funds, and hedge funds; investment advice; and all other financial investment activities including stock quotation services. For points in the following article, NAICS 523 industry components will be referred to from now on as investments or the securities industries. This fundamental branch of the Finance and Insurance (NAICS 52) sector in Connecticut comprises some of the highest paying and fastest expanding industry segments anywhere in the world. It is definitely where Connecticut's growth and money is for now. All the while, markets will fluctuate.
Credit Cycle or Business Cycle?
Money is flowing around worldwide after years of lowered global interest rates. The World Central Banks were creating the "carry trade" by keeping foreign exchange rates competitively devalued and fighting Keynesian deflation fears by expanding the money supply (e.g., expanding credit/printing money). This was coupled with huge U.S. trade deficits and the resulting froth of global liquidity put into the world's monetary system has been finding locations where high-performing, risk-adjusted rates of return on investment can originate. Connecticut appears to have that location and that expertise, turning expansive credit under uncertainty into real capital when successful. Accumulated capital resources are subsequently the real means of production. And just like CEO's of last century who set up many corporate headquarters in Connecticut, the current asset-money managers now want to live as well as work here too. Connecticut is not a cul-de-sac missing out on the global economy. Instead it is a money draw adapting to globalization. Connecticut is one of the leaders of wealth management, creation, and storage, reshaping 21st century global capitalism. Nutmeggers invest the world's excess liquidity through a growing avant-garde investment sector of risk transfer instruments and financial savvy.
Already by 2007, pure private investment employment has broken through the 21,000-job level for Connecticut (chart on the front page), about doubling the counts from 1996, and now 6,000 positions higher than at the turn of the century. In 1990, private investment employment counts averaged 7,300 statewide. Connecticut averaged 19,330 jobs in 2005 and the average wage per job in the industry was $310,734, not including benefits. That is not a misprint! This helps to boost Connecticut to the upper echelons among states in per capita income, average wages, household income, and average disposable income as well as taxes paid per capita to Washington. Political sway and influence is coming with the mounting capital accumulation, especially in reform legislation like Sarbanes-Oxley and movements to regulate hedge funds. However, small investors need to feel protected in the capital markets and transparency is paramount to this safety for the individual.
Connecticut has outpaced employment growth in the securities industry nationwide (which has seen a decline) since 2001 and has outperformed most other Northeast states that have specialized in securities industry employment. Connecticut has not only increased its percentage of investment jobs in the State's total covered workforce (from 1.0% in 2001 to 1.2% in 2005, about double the national percentage), but has also increased its concentration of employment in this high powered sector in relation to other states in the nation (the location quotient rising from 1.564 to 1.948, +.384, since 2001). Only New Hampshire had more improvement in investment employment concentration (location quotient increase from 1.326 to 1.769, +.443) relative to other states in the nation in that time period. New Hampshire is cherry-picking Boston's mutual fund industry as a lower cost locale, while Connecticut is adding value by managing risk with absolute and high-performing returns, financial engineering, and "dollar hedging" expertise.
This means Connecticut is gaining employment market share in the securities industry compared with other states, even with average industry annual wage levels that are almost twice the national average ($310,734 to $166,950 in 2005) and highest in the country by far. This supreme pay comes from worksites in the State, not from residents commuting to New York. As a matter of fact, the 20,000 or so securities jobs located here pay better than the average securities jobs located in New York ($295,106 in the city; $274,322 statewide). Avoiding herding behavior associated with financial manias makes a difference, so some removal from Wall Street lets independent thinking and contrarian investing flourish for Connecticut's investment sector.
Connecticut was also one of the few states in the Northeast to add jobs since 2001 in this sector (+2,577). New Jersey still lost jobs (-2,230) over this period, but actually increased that state's concentration of securities industry employment (its location quotient went from 2.134 to 2.155), reflecting some of the dispersion from the devastating effects of 9-11 on Wall Street combined with a slower loss than the nation. Decentralization of the financial industry has spawned more financial innovation for Connecticut. The expertise in Connecticut is delivering outperforming risk-adjusted returns on investment to produce those high average incomes and straight-up job gains.
Connecticut's proximity to the world's financial hub makes this key job growth in the State by and large a Fairfield County story so far. Since June 2000, Fairfield County has increased its proportion of investment employment in the State from 70% to over 80% now, or 16,800 jobs. This was a job growth rate of 7.9% a year in a time span that included an employment recession. The county had over 15,300 investment jobs in 2005 that paid an unbelievable average $357,757 per job. Greenwich and Stamford anchor the investment growth spreading in the gold coast. The State's other counties have much less investment employment and could benefit from increases in this sector. New Haven County's (1,001 jobs) contribution to investment job growth for the State has some relation to Yale University's very successful endowment performance, which is among the leaders in accumulated capital, risk-adjusted rate of return, and successful forays into new asset classes. This endowment supports Yale's future growth while the university supports Connecticut's investment forte (Behavioral Finance). Hartford County's (2,003 jobs) investment job levels are maintained by the insurance industry's need for and placement of more specialized investment products, as well as individual investment activities of the aging population. Acquired wealth needs purchasing power protection.
Investment Niche Necessity (Mother of Invention?)
The employing sectors in the securities industries are diverse and the NAICS industry coding system somewhat reflects this. Hedge funds are not only venture capital participants but also act like private equity and have even gone whole-heartedly into company operation and management. Some hedge funds may even become public companies to access more capital. Is a fragmentation happening in the securities industries like what happened last decade to the insurance industry's old-line companies after Hurricane Andrew? Frankly, some of Connecticut's investment employment growth may be coming from the splintering of the insurance industry and the crossover specialization and expertise that is so successful for risk and capital management. Some capability is also coming out of the Wall Street talent pool, as technology has led to some dispersion, decentralization, and need to break away from the "herd on the street" where size can be the enemy of performance. Newly minted MBAs are flocking to the industry as well. This fragmentation may be just really following the money as insurers, pension funds, and investment banks are placing ample institutional money with the hedge funds, that are providing the risk-adjusted returns.
"(Alan) Greenspan called exotic derivatives, and their hedge fund architects, "pollinating bees" and "extremely important" to a complex global economy, since their high rates of return help stabilize the entire economic system and offset meager savings rate."1 This could be even truer as individual shareholders need help in combating corporate malfeasance. Activist hedge funds and private equity are taking on inefficient and greedy management and in some cases bringing home to Connecticut some of the corporate influence that has been lost from Connecticut in recent years through out-of-state mergers and relocations. Stock markets are becoming commoditized with indexers while specialized Connecticut players are developing their niche. And these titans and their investment pools are also funding movies and influencing many other industries. Additionally, market and commodity research firms are also positioning themselves around the hedge fund complex in Fairfield County. There are a lot of opportunities for business spin-offs from these high paying segments.
The Alternative Investment Space (NAICS 5239)
Notice that Connecticut's growth is coming from "the alternative space." The three main sub-components of the securities industry are Securities and Commodity Contracts Intermediation and Brokerage (NAICS 5231), 10,666 jobs, 51.1% of investment jobs, 4.0% growth since 2000; Securities and Commodity Exchanges (NAICS 5232), 261 jobs, 1.3% of investment jobs, -52.1% job drop on a small base, NASDAQ downsizing; and Other Financial Investment Activities (NAICS 5239), "the alternative investment space," 9,951 jobs, 47.7% of Connecticut investment jobs, a nice 79.2% job gain. Boutique investment firms are taking advantage of baby boomers looking to their retirement needs and high net-worth individuals searching for the best risk-adjusted returns. The industry is responding to more individual customer need, not just the mass market. Free movement of capital and the growing in-state capital accumulation shows that Connecticut's environment is ripe for more wealth creation. Technological innovation and implementation comes from regions of capital accumulation. And investment from accumulated capital will help sustain growth better in the long run than the credit-stimulated housing demand of late, despite some recent hedge fund failures from excessive risk taking rather than prudent investment.
Connecticut's Premier "Long Tail" Industry - An Emerging Force
"The Long Tail is a powerful new force in our economy: the rise of the niche"2 or industry prospering by moving from mass markets to niche markets. Other Financial Investment Activities perhaps exemplifies the ultimate "Long Tail" industry for Connecticut. Wired Magazine Editor-in-Chief Chris Anderson wrote of the "Long Tail" in 2004, which offers an alternative look at the future of different markets and how the Web influences them. It was first used to describe some entertainment industry trends evolving from the Internet, but could it be applied to economic development in all industries as well? Are markets and industries shifting from mass markets limited by singular blockbuster appeal (mutual funds) to unlimited markets distributed with lowered cost or enhanced expertise in the tail or the niche (hedge funds)? High net worth (accredited investors) and boutique investment are about as niche market positioning as one could get. Connecticut's "long tail" investment industry make-up and expertise are constantly evolving and pushing out and down the niche part of the curve.
Capitalist-Entrepreneurs: Game Changers
There has developed an allure associated with working in the "alternative investment space" that has become increasingly evident especially for the Connecticut participants who often are deploying much of their own capital. "Skin in the game" is a form of internal risk management, as no one wants to lose their own money. Edward Lampert, investor, corporate strategist, and considered the epitome of the next generation of Warren Buffet-like investors, has taken over Sears Holdings; Stephen Cohen of SAC Capital, known for secrecy, has posted an average of 40%+ gains annualized since 1992; Yale's cream of the crop big endowment team has had outstanding performance for its size (David Swenson). These and other successful asset managers know privacy helps protect strategy, yet they are developing international reputations. Some have to downplay their success or they'll be targets for the next heir apparent. Obviously, some of the disproportionate take- home pay of the stars in the sector is skewing the overall averages, but it does show that Connecticut has some of the most fertile ground for wealth creation and preservation.
Connecticut is an Investment State
Not many industry segments have the potential ability to change and influence every industry, both large and small, through capital infusions, reallocations, leveraged buyouts, mergers and acquisitions, financial innovation, and venture capital. Connecticut investment sectors do. And, of course, the great recent comparative run in this sector will not last forever. A broad financial market downturn would undoubtedly weigh heavily on the economy and the ongoing worldwide credit expansion will eventually subside. Also risk appetites and high fees should become more sensible. However, this industry does play both sides of the market, bull (long) and bear (short), and gained employment during the tech sector bust in Connecticut. Preservation of capital is still Warren Buffet's rule #1 of investing and that is what hedging tries to resolve. Diversification is still the best hedge. Rule #2 - Don't forget rule #1!
Hyped consumer demand and spending does not sustain an economy; saving, investment, and entrepreneurship are the most critical inputs for economic growth and improved living standards. Yet the constant downplaying of Connecticut growth prospects lately has led to some recent accounts of "prosperity at risk" in describing Connecticut's economy. Connecticut securities industries defy this pessimism. Young adults and recent graduates need evidence of world-class growth, success, and monetary gain emanating from Connecticut's industry makeup, especially global financial services. It is there. Connecticut is an investment state. Invest in yourself and stay home.
For the full report with accompanying charts and tables visit www.ctdol.state.ct.us/lmi/
1 Q&A with Liz Ann Sonders. "Dr. Alan Greenspan: In-depth and Thoughtful" Impact Daily, November 7, 2006.
2 Book Review WWW.powells.com/biblio/1401302378?&PID=31291. Anderson, Chris "The Long Tail; Why the Future is Selling Less of More." Powells.com Staff Pick.
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