Majestic Research

CFA Magazine

In the Rough: Independent research is in a difficult spot, but some players still have a shot at success

By John Rubino
Published: September 17, 2007

Unbundled research. Good research involves several discreet steps, including gathering proprietary information, analyzing it, and making the results comprehensible to money managers. Top sell-side analysts used to do it all themselves. But that’s increasingly not the case. The services that have been really successful in the independent space are the ones that have taken the traditional Wall Street research process, unbundled it and sold it separately, says Mayhew.

Consider SRI, or socially responsible investing. Issues such as corporate governance and environmental practice were once a fairly minor part of the average company’s investment profile. But for a growing segment of the buy side, they are becoming paramount, which creates a profitable niche for an SRI specialist such as Boston-based KLD Research & Analytics.

Back in the 1990s, KLD’s founders created the Domini 400 Social Index of companies with good citizenship records.  The idea was to encompass some social restriction ideas and mirror an existing benchmark to see if they could outperform that benchmark. Since then, [the Domini 400] has generally outperformed the S&P 500 Index, says Randy O’Neil, KLD’s managing director for global sales. Along the way, says O’Neil, KLD realized they were doing a lot of research on companies in order to maintain the index, and decided to start marketing the research. KLD now has 25 analysts serving nearly 400 clients that license its various indices, databases, and screening services.

Channel checking, meanwhile, has morphed from grunt work to high-tech specialty. Back in the old days, a channel check used to mean calling up 10 store managers or sending your intern to walk the isles of an apparel retailer to see how they are discounting and what their inventory looks like, recalls Tony Berkman, executive director of New York City-based Majestic Research. But, he notes, supercomputers and advanced search algorithms have automated the process, enabling firms like Majestic to offer “channel checking on steroids.

Majestic seeks out distributors or other middlemen with data containing unanalyzed industry intelligence. We approach them and say, Hey, we’d love to monetize this data for you, says Berkman. Majestic then mines the data to yield useful, proprietary insights.

An example is a firm [unnamed for contractual reasons] “that has a large business serving oncology clinics, says Berkman. By monitoring the company’s sales data, Majestic extracts a real-time picture of which drugs are being prescribed in what quantities and then draws inferences about pharmaceutical company revenue and earnings streams. Because Majestic doesn’t issue buy/sell recommendations and doesn’t rely on statements from company executives, it bypasses Reg FD. The result is intelligence of the type that the buy side can act on and that once justified top sellside analyst salaries.

And CFA charterholders take note: The skills required for this kind of work may not be found in a traditional MBA program. An ad on Majestic’s website for an equity research analyst seeks candidates who are equally comfortable with establishing a data partnership and querying the partner’s database with SQL [structured query language] calls.

This “In the Rough” article text highlights Tony Berkman and Majestic Research. The full “In the Rough” article appears in the Sept.-Oct. 2007 issue of CFA Magazine.

John Rubino, a former financial analyst, is the author of “How to Profit from the Coming Real Estate Bust” and “Main Street, Not Wall Street."