Channel Checking: The Value of Longitudinal Studies
In recent years, investors have
increasingly employed channel checks in order to obtain unique, timely and
proprietary information about companies and industries. Today, roughly half of
all investment firms conduct channel checks as a regular part of their
investment research process, and a third use third-party channel checking firms
to augment their internal primary research capabilities. While some money
managers conduct channel checks on a “one-off” basis as a means of testing or confirming
an investment thesis, most money managers believe that the true value of
channel checking is realized when it is used to monitor a company or industry
on a recurring basis.
Recurring channel checks, or “longitudinal
studies,” can deliver a range of advantages to money managers that have the
budgets and the patience to conduct them. They allow for the ongoing monitoring
of new industry trends. They also allow for the development of consistent,
standardized data sets that can be back-tested for predictive power. One-off
channel checks, on the other hand, can provide great “color” for developing or
testing an investment thesis, but can sometimes fail to capture how industry
trends change over time.
According to a recent Integrity survey
of 123 US-based money managers, more than half of all the money managers that
conduct channel checks as a regular component of their investment research
process believe that longitudinal studies are a “highly important” input in
their investment decisions. Yet recurring channel checks, while important for
tracking changes in demand over time, are more appropriate for some industries
than others. Industries that have short sales cycles and a large consumer base,
such as retail, tend to require more regular monitoring than industries that
have long sales cycles and a niche consumer base. Within the retail industry,
companies with higher inventory levels and inventory turnover rates need to be
monitored more regularly than companies with low inventory levels and inventory
rates, as inventory is a hard asset to control and easy to manipulate on balance
sheets.
Integrity’s upcoming ResearchFocus
report on the channel checking space identifies a range of third-party channel checking firms that can assist
money managers with longitudinal channel checking studies. Although most of
these firms will also conduct channel checks on a “one-off” basis, there are
several that only work with clients that seek to monitor companies and
industries over time.
Posted at 10:50 am by William Greene
