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A research method that combines investigative reporting with competitive
intelligence is giving investment managers the edge they need to outperform
stock market averages and beat their competition. By tapping panels of experts,
this method tracks changes in industry expectations-the key driver of stock
prices-from unbiased sources.

When Motorola announced in the summer of 1995 that the growth rate of cellular
telephone handsets sales had slowed by half, Wall Street reacted with the
vengeance of the betrayed. Motorola's stock dropped nine points in just one day.
But several investment portfolio managers felt almost smug at the news because
they had expected it and sold their holdings long before. How? They relied on
information provided them by a nontraditional approach to investment
management: marketing research.
As the number of investment managers continues to multiply, a fund manager's
ability to outperform such benchmarks as the S&P 500 and Russell 2000 stock
indices remains the most important marketing tool available to attract new
investment dollars. To surpass market indices, portfolio managers switch
hundreds of millions of dollars into, out of, and between selected stock market
investments. They spend millions of dollars each year searching for the right
information that will help them make the right decisions. They talk to corporate
management, evaluate earnings reports, consider economic trends and statistics,
and time markets.

The unfortunate reality, however, is that most portfolio managers fail to

outperform the market year in and year out. The quality and technical
sophistication of analysis used to value securities is solid, but the culpability for
poor to average results lies primarily with everyone using the same information
from biased sources (i.e., management).
A research panel approach developed by OTAOff The Record Research founder
Craig Gordon is giving some portfolio managers an edge. Through interviews
with key sources, the "off the record" approach provides insights into industry
growth rates from a pricing and volume perspective, changes in relative strengths
of leading companies in an industry, and external factors that influence industry
conditions. It combines the tools of investigative journalism, traditional research
methods, competitive intelligence gathering techniques, and quantitative tracking
to assess the investment market from a variety of perspectives.
GREAT EXPECTATIONS
Most investment decisions about whether to buy, hold, or sell stocks are based
on changes in expectations about a company's current or future operating
prospects. If investors expect Company A's sales to rise by 20% compared to the
same period of the previous year, that expectation is reflected in the current stock
price. If the company exceeds Wall Street's expectations, the stock rises
accordingly. If the company disappoints, however, the stock price drops. In
essence, the actual sales or profit levels do not drive prices, expectations do.
Consider the example of Lewis Galoob Toys.
Wall Street's infatuation with Galoob drove up that company's stock price to the
mid-$30s. But interviews with buyers for toy stores and mass-merchandise
chains revealed that sales and orders of the much-heralded Dragon Flyz and
SkyDancer dolls were slowing dramatically. Within weeks, the company
announced lower estimates for the quarter and the stock lost half its value within
days.
Portfolio managers traditionally have relied on information supplied by
companies, government agencies, trade associations, analyst reports, and
financial valuation models. Unfortunately, this information is immediately dated
when it is released, and it comes from sources that can be biased. Analysts, like
the portfolio managers they serve, also tend to rely too heavily on management
for information. Worse, in some cases, these analysts are employed by
investment banks that have a stake in the company as an underwriter. Even
accurate figures represent past, not current, performance. Because companies
generally report operating results quarterly, it might be months before the
investment community knows how a company actually performed. Once the
information is released, portfolio managers must act on it immediately or risk
being left behind with an investment decision based on the wrong information.

Applying a hybrid marketing research/journalism approach to investment

decision-making provides early and timely information about an industry or
company's current condition and future prospects. Knowing the correct sources
of information and providing consistency in tracking is critical to the success of
marketing research in investment management.
INVESTIGATIVE REPORTING
The investment business relies on uncovering and reporting information with
speed and accuracy in as unbiased a manner as possible. The off-therecord
approach uses journalists trained and experienced in gaining access to
appropriate sources. They know how to probe for information, distinguish truth
from rumor, write succinctly, and meet deadlines. These skills enable them to
take the lead in determining how to conduct interviews and free them from having
to follow heavily structured questionnaires. After reviewing applicable industry
materials and the project's objectives, they are given free reign to do what they
do best: investigate. Journalists are accustomed to meeting deadlines and
responding to a need quickly.
Although assignments usually are scheduled on a regular basis, collecting,
analyzing, and reporting findings can often be completed within one week.
Flexibility is a key ingredient in this approach. A researcher might be called late at
night to be briefed on an assignment that must be carried out the next morning.
As in the newspaper business, speed is essential because information that is
public knowledge is of no value to portfolio managers.
This is not to say that the approach lacks rigor. Experienced researchers must
oversee the development, execution, and presentation of the research, and a
team of journalists and marketing research professionals must identify and define
key research issues, develop a research instrument, identify the appropriate
interview sources, conduct interviews, compile results, and produce timely
reports for clients.

EXPERT SOURCES
This research approach assumes that the people directly or indirectly involved in
the company's markets are in the best position to supply essential information.
Establishing expert panels in different industries and interviewing panelists
regularly is one way to tap this expertise. OTA's panels are made up of suppliers,
distributors, buyers, company managers, and industry experts who can be
reached quickly and provide relevant, timely information on specific companies
and industries. Panel size and composition will vary depending on the specific

issues to be investigated and whether or not the study provides coverage on a

domestic versus global basis. The more issues the greater the geographical
coverage on a domestic versus global basis. The more issues investigated and
greater the geographical coverage needed; the more varied and larger the panel
will be. While an average panel is comprised of between 25 and 35 members,
panel size can range upward of 70 members. For example, a recent candy study
panel included 25 buyers for supermarket, convenience-store, drugstore, and
variety chains representing 13,507 stores. Alternatively, several different panels
ranging from 25-50 members are consulted to monitor the semiconductor
industry; sources include suppliers, equipment manufacturers, distributors, and
original equipment manufacturers.
The advantages of using longitudinal panels to track changes over time, which is
of primary importance to Wall Street, have been well documented. But there are
other advantages as well: Accuracy. The need for factual information is
paramount. Panels should, therefore, include only sources that provide timely,
accurate information-market gurus known for their keen ability to identify
emerging marketplace trends.
Speed. Using a panel speeds report turnaround because sources can be called
at a moment's notice; cold-calling is unnecessary.
Action. Panel members can become proactive. They not only respond the
researcher's calls, but also take the initiative to let the reporter know when
something new develops. For example, a panelist who is a buyer for a major
drugstore chain recently alerted OTR to a tremendous increase in the number of
doctors prescribing a new drug. The information was passed on to clients weeks
before the company announced quarterly sales results which exceeded Wall
Street estimates by a wide margin.
In exchange for supplying information, OTR sources receive copies of all reports
germane to their specific industry areas. This helps ensure that high-quality
information is supplied. One of the most important keys to the success of
applying marketing research to investment management is in confidentiality of
sources. Sources are not named in reports, which not only helps ensure the
accuracy of the information but protects panelists from revealing information to
their competitors.
DEFYING CONVENTIONAL WISDOM
The off-the-record approach tracks changes in industry expectations. One study
in late 1996 involved Computer Associates, an information services (IS) vendor.
Even though poor customer satisfaction was a given, the conventional wisdom
held that businesses had no other choice but to stick with Computer Associates.
Through interviews with IS managers, however, researchers learned that some of
the company's customers were doing the unthinkable: switching to a new vendor.

Portfolio managers who trusted the research findings sold the stock. Within four
weeks, Computer Associates announced earnings would not meet Wall Street's
expectations. When the report was conducted, Computer Associates' stock was
trading at $60; in four days, it plunged to $40.
In early May, Wall Street was still anticipating healthy growth in the credit card
industry. But interviews with a panel of representatives from large banks and
credit card operations indicated that payment delinquencies were growing at
epidemic proportions, taking a big bite out of card issuers' profits. A month later,
when Bank of New York announced that it had boosted credit card loss reserves
by $350 million, investors clobbered bank and credit card stocks. But investors
who had trusted the marketing research safely divested their holdings prior to the
decline.
The approach also works extremely well on the buy-side to help portfolio
managers get into a stock when it is undervalued and before other investors
realize that a fundamental shift in the company's market has occurred. For years,
Wall Street believed that IBM's mainframe business was dead. While other
investors were shunning the stock, those who had read the research report
realized mainframes were making a comeback due to data warehousing and the
Internet. IBM stock, which was selling in the low to mid-$SOs, has almost tripled
since Wall Street saw improved quarterly results.
INTEGRAL TOOL
Just as marketing research has been providing consumer products
manufacturers and other suppliers with information that helps them target their
markets more effectively, investors are now realizing the value of real-time,
unbiased checks on the companies in which they invest. Whether for cellular
telephones, toys, or computers, marketing research is becoming an integral tool
for portfolio managers to evaluate the potential of their investments.
These types of research panels might have other applications in industry as well.
Recently, some of the CFOs and marketing vice presidents from companies
investigated through these panels have contacted OTA to see how it was done.
These executives are hearing through the investment community "grapevine"
that the panelists' evaluation of the company's marketplace performance (e.g.,
sales market share, strengths/weaknessess, and competitive position) is
correlating highly with their company's future stock price movement. There is
tremendous interest on their part to learn more about how this powerful research
method might help them.