Inv Management-EU 2010
Inv Management-EU 2010
Inv Management-EU 2010
INVESTMENT MANAGEMENT
THE INSIDE SCOOP ON INVESTMENT MANAGEMENT CAREERS
INVESTMENT MANAGEMENT
EUROPEAN EDITION
European Edition
INVESTMENT MANAGEMENT
BY ADAM EPSTEIN, COLIN RICHARDSON, MARY PHILLIPS-SANDY AND THE STAFF AT VAULT
Copyright 2009 by Vault.com Inc. All rights reserved. All information in this book is subject to change without notice. Vault makes no claims as to the accuracy and reliability of the information contained within and disclaims all warranties. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Vault.com Inc. Vault, the Vault logo, and the most trusted name in career information TM are trademarks of Vault.com Inc. For information about permission to reproduce selections from this book, contact Vault.com Inc., 6 Baden Place, London, SE1 1YW, +44(0)20 7357 8553. ISBN 13: 978-1-58131-710-7 Printed in the United Kingdom
Acknowledgments
We are extremely grateful to Vaults entire staff for all their help in the editorial, production and marketing processes. Vault also would like to acknowledge the support of our investors, clients, employees, family and friends. Thank you!
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Table of Contents
INTRODUCTION 1
THE SCOOP
Chapter 1: Buy-side vs. Sell-side
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Jobs on the Sell-side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 Jobs on the Buy-side . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
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The Drive for Diversification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Types of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Risk Characteristics of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 Types of Bonds and Their Risk Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Alpha vs Exotic Beta . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Risk Analytics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 Portfolio Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 How is This Relevant to My Job Search? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
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Research Styles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Capital Structure: Equity vs. Fixed Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Research Roles: Traditional vs. Alternative Asset Managers . . . . . . . . . . . . . . . . . . . . . . . .35
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GETTING HIRED
Chapter 5: Targeting Your Job Search
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Getting the Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 Preparing for the Interview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 What They Want . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54 Where Do You Fit? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
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A Basic Breakdown: Large Generalist Firms vs Specialist Firms . . . . . . . . . . . . . . . . . . . . .55 A Closer Look: Hiring Process Pros and Cons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Is This Firm Right for Me? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
ON THE JOB
Chapter 7: Portfolio Management
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The Three Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 Senior Portfolio Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Associate Portfolio Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Portfolio Manager Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Portfolio Implementers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
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Senior Research Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69 Investment Research Associate-Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 Investment Research Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 Alternative Entry Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
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Account and Product Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73 Product Management Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 Account Management Associates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 Marketing Specialists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 Business Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 Risk Analyst . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
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Investment Operations Graduate Trainee at Baillie Gifford . . . . . . . . . . . . . . . . . . . . . . . . .77 Investment Analyst at Baillie Gifford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 Senior Associate, Client and Consultant Relations, Fidelity Investment Managers . . . . . . .81
APPENDIX
Glossary Valuing a Company
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Introduction
Do you enjoy following the financial markets, whether reading the Financial Times, watching Bloomberg or checking stock prices on the internet? Do you want to earn good money? If so, you may find a career in investment management appealing. Investment management, also known as asset management, is pretty much what it sounds like: a client gives money to an asset manager, who then invests it to meet the client's objectives. In other words, investment management seeks to grow capital and generate income for individuals and institutional investors alike. The potential clients of an asset manager can vary widely. Asset managers who work for mutual funds, for example, manage money for retail clients, while asset managers at investment banks often invest money for institutional investors like companies or municipalities (often for pools of money like pension funds.) Asset managers can also work for hedge funds, which combine outside capital with capital contributed by the partners of the fund, and invest the money using complex and sometimes risky techniques, attempting to receive extraordinary gains. Asset managers buy their stocks, bonds and other financial products from salespeople at investment banks, who are on what is called the "sell-side." (Asset managers are on the "buy-side.") Because they make commissions on every trade they facilitate, salespeople provide information (research, ideas) to asset managers, in an effort to get the asset managers to trade through them. For this reason, salespeople often shower asset managers with perks like sports tickets and expensive dinners at fancy restaurants. Asset management basically boils down to this: researching and analyzing potential investments, and deciding where exactly to allocate funds.
In recent years global financial services companies and investment banks made efforts to grow their asset management businesses. Thats because investment managers fees are based on the amount of money theyre given to investso as long as they have clients, theyll make money for the bank. This fee-based arrangement stands in contrast to businesses like mergers and acquisitions advisory, which can be highly variable depending on market conditions. But even the relatively stable asset management industry felt the impact of the 2008 and 2009 global recession: jittery investors, frozen credit markets, the collapse of several major banks and proposed regulatory overhauls meant uncertainty for everyone in finance. Some firms that were battered by the recessionincluding the investment bank Credit Suisse and insurance giant AIGput their asset management divisions up for sale, spinning them off to raise capital to cover losses in other divisions. Despite this rough patch, the asset management industry is poised to regain its strength, even if the environment in which it operates has changed.
The Vault Career Guide to Investment Management will serve as an insiders guide for careers in the industry. It will provide you with the knowledge to appropriately target your career search and a framework to handle the most challenging interviews. It will also break down the many different career positions that are available to both undergraduate and graduate students.
HISTORY
The beginnings of a separate industry
The process of managing money has been around for almost 140 years. At its outset, investment management was relationship-based. Assignments to manage assets grew out of relationships that banks and insurance companies already had with institutionsprimarily companies or municipal organisations with employee pension fundsthat had funds to invest. These asset managers were chosen in an unstructured way, with assignments growing out of preexisting relationships rather than through a formal request for proposal and bidding process. The actual practice of investment management was also unstructured. Asset managers might simply pick 50 stocks they thought were good investments as there was nowhere near as much analysis on managing risk or organising a fund around a specific category or style. Historically, managed assets were primarily pension funds. Traditional and alternative asset classes such as retail funds, hedge funds and private equity had yet to mature.
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Unsettled times
How did the credit crunch hurt the asset management industry? First and foremost, the lack of credit meant a lack of leverage for fund managers, which reduced the size of the bets they could make and thereby lowered returns. Spinoffs, sales and downsizing at major investment banks made an additional impact on those banks asset management divisions. Ironically, the fact that some asset management divisions performed well despite the crisis made them more likely to be sold, because banks knew theyd be attractive on the market. As an example, Citigroup sold its own asset management division in 2005. But as one of the hardesthit banks in the credit crisis, Citi was forced to continue divesting units that werent part of its traditional banking businesses, so in 2009 it sold its entire stake in Japanese asset manager Nikko Asset Management. The trend continued in Europe: Barclays put its successful asset management division, Barclays Global Investors, up for sale in order to streamline itself and boost capital ratios, and the beleaguered Commerzbank sold its Swiss asset management unit to Liechtenstein-based asset manager LGT Group. Focussing on core banking activity was the name of the game for battered banks around the world. Pure-play asset managers that suffered heavy fund outflows experienced troubles on their own. Schroders, a major UK fund manager, slashed 225 of its 3,000 jobs in the second half of 2008 after a 21 per cent decline in its funds under management.
Mergers and acquisitions in the asset management industry were hot during 2007, with plenty of takeovers by private equity firms and lucrative sales of hedge fund assets. In fact, with 242 deals closed, 2007 was the most active year on record for asset management M&A. The pipeline kept moving in 2008, with 217 deals, but there were some noteworthy changes in the landscape. In 2007, over a dozen transactions were valued at $1 billion or more; in 2008 just three deals fetched such high prices. Disclosed deal value was just $16.1 billion in 2008, compared to $52.1 billion in 2007. No wonder: almost two-thirds of the transactions in the second half of the year were related to divestitures, evidence of sellers distress and the need to offer units at fire sale prices. In another shift, investment banks and insurance companiesmajor buyers of asset management firms in the late 1990s and early 2000sbecame sellers, unloading their purchases to private equity buyers or entering into strategic partnerships to form pure-play asset managers. In 2009, the deals kept coming and, overall, for the year, $4 billion in assets under management changed hands, either as part of acquisitions or divestitures.
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Convergence
The European asset management sector is currently experiencing massive convergence between traditional and alternative investment styles. Hedge funds, private equity funds and traditional asset managers are competing increasingly closely as the lines between the asset classes become blurred. Investors increasingly understand how to invest and which investments could generate higher returns in a regulated environment. Regulators have realised this and are now offering traditional asset managers new flexibility as long as investors remain protected. The search for the alpha has aided the process. Traditional asset managers have been buying hedge fund boutiques for some time. But now the difference between these businesses and their core investment strategies are disappearing. Long-only managers are also using regulatory devices such as UCITS III (and soon, UCITS IV) to offer hedge fund products for retail investors and other products to widen the choice for their institutional investors.
UCITS
UCITS, Undertakings for Collective Investment In Transferable Securities, is a European Directive first enacted in 1985 by the European Commission. The main point of UCITS is to enable funds to be passported to other EU countries and sold with minimum interventions by national governments and regulators. Indeed, international regulatory barriers have been eroded by UCITS, accelerating the development of the cross-border funds market. UCITS III, enabled in 2002, provides increased investment flexibility by expanding the investments in which a fund can take positions. Next up: UCITS IV, which has been approved by the European Parliament and will take effect in 2011. UCITS IV will simplify administrative requirements for cross-border distributed funds, and will give management companies a passport to manage funds across borders without having to go through a service provider in the funds domicile. Because of these and other enhancements, the new directive is expected to increase the number of small funds that merge into mega-funds capable of cross-border distribution. At the same time, UCITS IV aims to strengthen existing regulations with provisions for greater transparency to investors and required disclosures by funds.
Meanwhile, alternative asset managers are reaching a wider audience among investors through regulated fund vehicles and eschewing offshore domiciles of the Caribbean and the British Isles for EU member states, such as Luxembourg. Even the staid European pension fund industry holds approximately 20 per cent of its assets in alternatives, including hedge funds, private equity and real estate funds, according to the Alternative Investment Management Association (AIMA), the global hedge fund association. There is convergence among alternative assets, too. Private equity houses and hedge funds are frequently adopting similar investment strategies. Cheap credit, low volatility and rising equity markets encouraged hedge funds to enter the private equity market until the credit crisis blew up. More strategically, hedge
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funds are increasingly ring-fencing capital for illiquid investments, similar to those made by private equity. Recently they have deployed these investments up and down the capital structure, including second lien and mezzanine debt products. Private equity houses have acquired undervalued assets and businesses through public market deals. Many experts suggest this could lead to further growth in hybrid alternative investment firms. We will expand upon this in more detail in Chapter 2.
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to investment managers might be symbiotic, to some extent, but those managing money have more options to guarantee their survival.
Hours
The investment management industry tends to have a work load that varies. Working at a mutual or hedge fund typically means hours dictated by when the market opens and closes, and in many cases balances out to a fairly normal schedule. Land a job at a private equity firm and the story may differ; the salary is bigger, but the work hours are longer. Smaller private equity players still require their staff to work 60 to 70 hours a week. Still, they don't compare to the hours put in by investment bankers. Investment bankers are known for working extremely long hoursaround 90 to 100 per week on average (or about 16 hours per day during a six-day workweek and 14 hours per day during a sevenday workweek). Some industry participants admit to working in the office all weekend and sleeping under their desks two or three nights a week. Graduates often look to work in the investment banking industry for as short a time as possible, so they can retire early or move on to something they enjoy more. Many see investment banking as a stepping stone to working in private equity or a hedge fund. Because of the long hours and stressful nature of the job, attrition rates are high and burnout is not uncommon. Insiders argue about whether investment banking is more social than investment management, despite the latters shorter workweeks. As an investment banker you usually have a group of other analysts or associates working alongside you. Youre also enduring those gruelling hours together, which can lead to a certain sense of camaraderie. When there is downtime, I-bankers often use it to build relationships that lead to social interaction outside of work. In investment management, you might be the only associate. Private equity and hedge funds, in particular, tend to be smaller than investment banks and dont require as many analysts and associates to do the work. Particularly at a very small firm, this means the average day can seem isolated and lonely, though investment management analysts at the bigger banks claim this isnt the case in larger workplaces.
Pay
Working at a hedge fund or private equity firm is traditionally more lucrative than investment banking, although such firms very rarely employ university leavers. At a private equity firm you will make roughly as much a year as post-MBA associates at banks makesignificantly more than youd make as an analyst. Hedge fund pay varies widely between funds, and many investment management companies have trimmed pay in response to recent economic conditions. But, as a rule of thumb, the normwhich can mean different things at different firms, these daysis around 70,000 for those coming in directly from banking, plus a bonus that will take you to around 100,000 to 150,000, very similar to private equity associates. This is much more than what you could get as a third-year investment banking analyst, and is about on par with what post-MBA associates at investment banks make. The gap between salaries becomes increasingly obvious in the upper echelons. Some hedge fund partners,
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albeit not representative of the industry as a whole, earn 1 billion or 2 billion a year, more than the CEOs of even the biggest investment banks. Graduates who join asset managers straight out of university may initially take home less than their investment banking counterparts. The average starting salary of graduates in the asset management industry is around 35,000, according to one HR manager at an investment management firm, whereas graduates in investment banking start on a median of 40,000 to 45,000. However, you move up the pay hierarchy with bigger leaps at asset management firms, and often in less stressful environments. And its important to keep in mind that compensation and pay structure may differ from company to company; one investment management insider said that the pay and bonus offered at her firm was exactly the same as what was offered at an investment bank where shed previously worked.
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THE
SCOOP
Chapter Chapter Chapter Chapter 1: 2: 3: 4:
Buy-Side vs. Sell-Side Investment Styles Financial Research Breakdown The Clients of Asset Managers
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Vault Career Guide to Investment Management, European Edition Buy-Side vs. Sell-Side
typically garner more responsibilities, such as attending industry events and investor presentations, and running various financial analyses. Sell-side research associate-analysts build investment models, assist in generating investment recommendations, write company and industry reports, and help to communicate recommendations to buy-side clients. Over time, the associate-analyst may often pick up coverage of additional stocks (often small or mid cap), using the analyst as a mentor.
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Vault Career Guide to Investment Management, European Edition Buy-Side vs. Sell-Side
When beginning your career on the buy-side, you typically will start as an analyst, or in one of these aforementioned four areas.
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Vault Career Guide to Investment Management, European Edition Buy-Side vs. Sell-Side
Portfolio manager assistants screen for potential investments, monitor portfolio characteristics and assist in client relations. Portfolio manager assistants offer support to portfolio managers, who typically oversee specific investment funds (for example, a specific mutual fund or pension fund). Research assistants perform both administrative functions as well as those duties of a research associate. Tasks include answering the phone, scheduling meetings, listening to earnings conference calls if the associate or analyst is too busy and data analysis. Over time, if the assistant shows aptitude and ambition for research, more responsibility can be thrown his/her way. This can often lead to a promotion to research analyst. Another less travelled route for graduates is to join a marketing and sales department as either an account manager or a product manager. Account managers assist in creating portfolio review presentations, developing promotional presentations for potential new clients and answering requests for proposals (RFPs) issued by institutions seeking to hire new investment managers. They are also in charge of managing and servicing existing clients, who might threaten to pull their money out. The role is traditionally more marketing than investing and involves a lot of wining and dining the potential clients on the company card. As the saying goes, its a hard life! They also meet investment consultants and play a role in developing new products. Product managers serve as liaison between the portfolio manager, account manager and client. They typically have greater in-depth knowledge of the particular products (i.e., stock mutual fund) strategy and investment focus. Product associates often seek new assets to put into their fund and have a strong understanding of both the funds investment performance and external markets. Account and product management has become increasingly critical in the investment management industry. This path is an outstanding alternative for those interested in the industry, but not driven by investing money. Also, the role of an account or product manager can serve as an entry point to the industry or as a springboard to switch to the investment side. Another increasingly common route for graduates to get into the industry is operations. Operational staff do everything from working in IT to settling and reporting trades, project management and customer service. Front-office operational staff are often business-minded and knowledgeable about financial markets. Back-office staff can be more technically gifted but less business savvy. As regulations have recently tightened, graduates are hired more often in risk and compliance divisions as members of the operations teams. Jobs in operational departments, such as risk, can be quite similar to an investment analyst position in terms of research and report writing. In a risk team, however, there will probably be more number crunching. Risk analysts are responsible for ensuring fund managers know what their exposure and risk is in various areas. They monitor the trade managers that are making and any news/events that could affect these trades. A significant part of the job is crunching numbers and feeding them back to fund managers. Systems developers carry out a wide range of tasks depending on the department in which they work. Those in back-office positions can be responsible for the performance and maintenance of one or more computer systems. In bigger firms, each developer will usually be assigned one system. Developers in innovation and architecture groups will normally be responsible for isolating and
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Vault Career Guide to Investment Management, European Edition Buy-Side vs. Sell-Side
investigating new technologies that may aid business. They will pitch these technologies to their clients, normally within the company, who will decide whether or not they will be adopted. Business analysts facilitate interaction between the front-office business staff and back-office technical staff. Often from an IT background, they will be responsible for finding new systems and monitoring and maintaining existing system performance. They will also make process changes as required. The role requires a great deal of liaising with other departments to keep up-to-date. In the words of one business analyst, the role is to build a bridge between the business and technology side of a firm. You can relate to the techies and their jargon and at the same time, translate it into understandable language for the business side.
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Vault Career Guide to Investment Management, European Edition Buy-Side vs. Sell-Side
COMPENSATION
In general, compensation in asset management is a combination of base salary and bonus. As you move up in the organisation to senior portfolio manager or senior account and product management official, your pay becomes more heavily weighted toward bonuses. Senior portfolio manager pay is somewhat contingent upon relative investment fund performance, size of the fund managed, new assets invested in the fund and overall firm performance. Senior account and product management compensation is weighted toward new account generation and the attrition level of existing accounts. The typical starting salary for entry-level graduates in research positions is around 35,000 in London, with bonuses of 20 per cent, depending on economic factors. Base salaries are slightly less in the rest of Europe and the UK. After five to eight years salaries rise to around 65,000 to 100,000 with bonuses of 40 per cent, again depending on circumstancesbonuses of 40 to 100 per cent are possible, but they may be lower if the firm has not fared well. Typical salaries at senior levels can be 100,000 to 130,000 with bonuses of 50 to 100 per cent. Product and account managers usually earn slightly less than their research counterparts. However, marketers in some funds can receive a bonus of 20 per cent on the fees earned for the money they bring in. This means massive bonuses, on the verge of 1 million, are distinctly possible at top-performing funds. Even those who start in back-office operational positions can earn as much as 35,000 a year if based in London. Aside from job title, there are two other factors that have a major impact on the amount and type of compensation received. First factor is the type of asset management firmtraditional or alternative? Retail funds offer steady compensation and job security, whereas hedge funds offer the potential for high compensation with minimal job security (and, these days, the risk of pay restrictions imposed by financial authorities). Second factor is the structure of the asset management firmpublic or private? Public retail funds and hedge funds can offer employees stock options or restricted stock. Many asset management firms are private, so they can offer their senior personnel direct equity interests in their companies. This can be highly lucrative, as many firms pay out a significant portion of their annual earnings to their equity partners.
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Investment Styles
Chapter 2
Investment style is often a loosely used term in the industry and is a reference to how a portfolio is managed. These styles are typically classified in one of three ways: The type of security (i.e., stocks vs. bonds) The risk characteristics of the investments (i.e., growth vs. value stock or Treasury vs. junk bonds) The manner in which the portfolio is constructed (i.e., active vs. passive funds) It is important to note that all of these styles are relevant to the different client types covered in the previous chapter (mutual fund, institutional and high-net-worth investing).
TYPES OF SECURITY
Type of security is the most straightforward category of investment style. For the most part, portfolios invest in either equity or debt. Some funds enable portfolio managers to invest in both, whereas other funds focus on other types of securities, such as convertible bonds. For the purpose of this analysis, we will focus on straightforward stocks and bonds.
Stocks
Equity portfolios invest in the stock of public companies. This means the portfolios are purchasing a share of the companythey are actually becoming owners of the company and, as a result, directly benefit if it performs well. Equity investors may reap these benefits in the form of dividends (the distribution of profits to shareholders), or simply through an increase in share price.
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Bonds
Fixed income portfolios invest in bonds, a different type of security than stocks. Bonds can be thought of as loans issued by such organisations as companies or municipalities: they are often referred to as debt. Like loans, bonds have a fixed term of existence and pay a fixed rate of return. For example, a company may issue a five-year bond that pays a 7 per cent annual return. This company is then under a contractual obligation to pay this interest amount to bondholders, as well as return the original amount at the end of the term. Although bondholders arent owners of the bond issuer in the same way that equity shareholders are, they maintain a claim on its assets as creditors. If a company cannot pay its bond obligations, bondholders may take control of its assets (in the same way that a bank can repossess your car if you dont make your payments). Lenders further up the capital structure normally find it easier to redeem assets of the company. Institutions such as banks will normally be reimbursed before individual bond holders. Although bonds have fixed rates of return, their actual prices fluctuate in the securities market just as stock prices do. (Just as there is a stock market where investors buy and sell stocks, there is a bond market where investors buy and sell bonds.) In the case of bonds, investors are willing to pay more or less for debt depending on how likely they think it is that the bond issuer will be able to pay its obligations.
Derivatives
In recent years derivatives have become a major part of the European asset management industry. Major asset management firms have implemented systems to enable the widespread use of derivatives as an investment and risk management tool. Simply put, a derivative is any financial instrument whose payoffs are derived from the value of an underlying variable at a time in the future hence the name. Types of derivatives include options, warrants and futures. Stock and index options are widely used by professional investors to hedge their share portfolios. Index options allow investors to gain wider exposure to the market rather than just single securities. Derivatives are also a risk management tool: depending on how they are used and how leveraged they are, they can either increase or reduce the risk of an investment. The derivatives market received a lot of attention in 2008, most of it negative. The US government was forced to spend $85 billion bailing out global insurance giant American International Group (AIG), which was crippled by losses on credit default swaps (CDSs), a type of derivative.
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Putting it together
There are many combinations of size and style variations and equally as many portfolios and investment products. For example, you have your choice of investing in small-cap growth stock portfolios, mid-cap value stock portfolios or large-cap core stock portfolios. (Or you can invest in smallcap value stock portfolios, mid-cap growth stock portfolios, and so on.) Investors often refer to the nine boxes of investment styles to categorise different portfolios. Mutual fund rating agencies usually categorise funds by this diagram. For example, a large cap value fund would primarily invest in companies with capitalisations around 35 billion and P/E ratios that are below the market average. Examples of each type of strategy (along with the ticker symbol) are listed in the boxes.
Value
Dodge and Cox Stock (DODGX)
Blend
Longleaf Partners (LLPFX)
Growth
Growth Fund of America (AGTHX)
Large
Capitalization
Mid
Small
We should note that the nine boxes are only a very generic way of categorising funds. Retail funds have created many different strategies over the years, which means categorising them is very difficult. We just briefly discussed the aggressive growth style, but another example would be the GARP style (growth at a reasonable price). In general, the smaller the company (small-cap stocks), the riskier its stock is considered. This is because large companies are usually older and better established, so its easier to make predictions as they have more historical financial data from which analysts can base predictions. However, with higher risk comes the potential for higher returns, so many investors dont mind putting their money in small-
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caps. Sometimes this strategy pays off: in 2007 small-caps in the UK outperformed large-caps for the fifth consecutive year, according to the Hoare Govett Smaller Companies (HGSC) Index. But small-caps were especially vulnerable to the economic woes of 2008, and fell to historic lows. For full-year 2008 the HGSC gave returns of -39.6 per cent, 9.6 percentage points below the FTSE All-Share. Growth stocks are also considered riskier, as investments in those stocks are bets on continued rapid growth (reflected in the high price-to-earnings ratio of these stocks). The biggest risk in investing in these stocks is the potential decline in the rate of revenue or earnings growth. If investors become worried that growth in one of these stocks will slow, it is not uncommon to see the stock drop by 20 per cent or more in one day.
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Investment managers also manage bond portfolios that mix together the different types of bonds. Indeed, hybrids of all kinds exist. Typically, though, if you have a lot of money, a better way to diversify is to invest in a fund made up of one type of bond. If, for example, youve got 100 million to invest, youre likely to give 10 million to the best yearling fund manager, 10 million to the best corporate bond fund manager, etc., rather than invest all $100 million in a hybrid.
Investment decisions
Just as with equity portfolios, there are a myriad of fixed income portfolio types. Although the ratings issued by agencies like Moodys and Standard & Poors provide investment managers with a guideline and starting point for determining the risk of a bond, managers also form independent opinions on risk, and make investment decisions based on whether they feel they have a good chance of receiving the promised payments. The easiest way to see this is to consider a junk bond. When a high-risk company (as measured by its credit rating) issues bonds, it must promise a high rate of return to compensate investors for their increased risk. An individual asset manager, however, through analysis of the company and its industry, may believe that the company has a good chance of performing well. The manager would likely then decide that the companys debt is a good investment.
Additional categories
Asset management firms also organise and market funds in categories that we have not discussed. Firms also market funds based on industries (health care stock funds) and even politics, such as firms with strong corporate responsibility records or environmentally friendly funds.
Recent developments
Because of the proliferation of alternative investment products (such as hedge funds and private equity), traditional asset managers have started to compete with these new styles. Most retail funds are governed by their specific mandates, which often preclude the manager from shorting stocks (or betting they will decline in value). However, several traditional asset managers have created traditional mutual fund products that enable the portfolio manager to short stocks. The one thing to note about these funds is that although the mandate provides the ability to short-sell, the fund is under no obligation to do so. One analyst working for a long/short product stated, we havent been short a stock in over a year. Perhaps the most recent development is the advent of the 130/30 funds. This type of mandate stipulates that the portfolio must be 30 per cent short and use those borrowed funds to purchase an additional 30 per cent of stocks, making the long position 130 per cent. Some fund managers have launched active high alpha funds that aim to outperform the market without resorting to hedge funds risky tactics. When it works, it works: for example, Schroders UK Alpha Plus fund, launched in July 2002, grew over 40 per cent by March 2005 and beat index returns in 2005, 2006 and 2007. Like many funds, however, UK Alpha Plus took a beating in 2008, posting -36.5 per cent returns.
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In order to restore savings, the UK government has unveiled a plan, set to take effect in 2012, that would automatically enrol employees in so-called Personal Accounts. Under this scheme, 4 per cent of employee salaries will be deducted from their paycheques and contributed to the account, and employers will have to contribute another 3 per cent. Tax breaks will result in another 1 per cent of salary that can be invested in the accounts, which will in turn be invested in various investment funds. (The government has not yet revealed which funds will be offered to these accounts.)
RISK ANALYTICS
Risk in the economy
Financial risk can never be eliminated completely, so much of an investment managers job focusses on measuring, monitoring and minimising it. Broadly speaking, there are two types of economic risk that can impact an investment managers work: systemic risks and specific risks. The former are threats to the entire financial system or large chunks of it; the latter are market risks that affect individual portfolios or individual assets in portfolios. Specific risks include capital risk, which is the loss of the initial investment, and currency risk, which is a loss precipitated by exchange rate swings. British investors who held lots of dollar-denominated assets, for instance, lost portfolio value when the dollar declined in 2008. Legal risk and compliance risk may not seem like financial concerns at first, but theyre still risks that can damage asset valuepicture a company whose stock plummets because the CEO is arrested for breaking the law. No matter how conscientious investment managers are, however, they cannot protect portfolios from systemic risk. For the most part, its up to central banks and governments to guard the financial system against collapse, a task that has become increasingly complicated. Systemic problems can cause widespread damage through a domino effect, as one financial institutions woes trigger a catastrophe for other others halfway around the globe, touching off waves of investor panic. Systemic risks rise as financial institutions become more interconnected and as they become more highly leveraged. The subprime mortgage crisis offers a recent example of systemic risks. When the US housing bubble burst and people began defaulting on their home loans, mortgages and mortgage-backed securities (especially those built on subprime mortgages) shed value, leaving many overleveraged institutions without the capacity to cover their losses. Complex instruments like credit default swaps that were intended to protect banks from the risk of creditors defaulting actually compounded the problem, as institutions that were supposed to pay this insurance lacked resources to do so. This phenomenon, known as counterparty risk, meant that everyone holding such contracts feared that the party on the other side of the contract might be on the verge of default. The result? Global panic, frozen credit markets, loss of liquidity and, ultimately, pricey bailout plans.
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sense of urgency to these discussions, so in summer 2009 the European Commission announced it would overhaul the EUs financial sector by establishing a London-based European Banking Authority, as well as a European Securities Authority in Paris and a European Insurance Authority in Frankfurt. These plans were finalised in late 2009, but the UK won one compromise: the new regulators will not be able to interfere with member nations fiscal sovereignty.
PORTFOLIO CONSTRUCTION
All portfolios, whether stocks or bonds, are compared to benchmarks to gauge their performance; indices or peer group statistics are used to monitor each funds success. Standard indices for equity portfolios include the FTSE 100 and All-Share Index. For bonds, popular benchmarks include the UK Gilts 2 Year. These indices are composed of representative stocks or bonds. They function as a general barometer for the performance of a particular portion of the market they are designed to measure. As composites, the indices can be thought of as similar to polls: a polling firm that seeks to understand what a certain population thinks about an issue will ask representatives of that cross-section of the population. Similarly, a stock or bond benchmark that seeks to measure a certain portion of the market will simply compile the values of representative stocks or bonds. Portfolio construction refers to the manner in which securities are selected and then weighted in the overall mix of the portfolio with respect to these indices. Portfolio construction is a fairly recent phenomenon, and has been driven by the advent of modern portfolio theory (MPT).
Active investors
Active funds buy and sell financial products in an attempt to outperform the rest of the market. They rely on research, forecasts and judgment to decide what securities to buy, hold and sell. Active portfolios adhere to their own investment discipline and investment managers invest in what they think are the best stocks or bonds. They are then compared, for performance purposes only, to the preselected index that best represents their style. For instance, many large-capitalisation active value portfolios are compared to the FTSE. (It is important to note that although active portfolios are still compared to indices, they are not designed specifically to mimic these indices. This is just to assess their performance.)
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Alternative methods
Variations of active and passive portfolios are present throughout the marketplace. There are enhanced index funds that closely examine the benchmark before making an investment. These portfolios mimic the overall characteristics of the benchmark and make small bets that differentiate the portfolio from its index. Another type of popular portfolio construction method is sector investing. This is essentially a portfolio that is comprised of companies that operate in the same industry. Common sector portfolios include technology, health care, biotechnology and financial services.
Variations of Active and Passive Portfolios
Risk
International U.S. Active Equity U.S. Passive Equity Balanced Equity & Fixed Income U.S. Fixed Income High Yield Convertibles Core Index Neutral Intermediate Stable Value Enhanced Cash Global Balanced U.S. All Asset Classes Small-Cap Core Mid-Cap Core Large-Cap Value Large-Cap Core Large-Cap Growth Market Neutral Enhanced Index Small-Cap Value Small-Cap Core Small-Cap Growth Mid-Cap Value Mid-Cap Core Mid-Cap Growth Large-Cap Value Large-Cap Core Large-Cap Growth Equity: All Global Emerging Markets Pacific Basin Europe Small-Cap Large-Cap Fixed Income: All Global Emerging Markets High Yield
Return Potential
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different investment style after you have some experience. Initially, it is best to be in an environment where you can learn about investing in general. However, when you target your career search, you should be informed of the firms particular investment style. Although large asset managers invest across a multitude of styles, other firms may only specialise in one style. It is always important to have knowledge of these nuances. This will definitely benefit you during interviews, because passion and knowledge about the industry always wins valuable points with recruiters.
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RESEARCH STYLES
Thus far we have mostly referred to fundamental researchthe analysis of a company, financial statements and company and industry trends to predict stock movement. However, there are several other types of research that asset managers conduct across many different types of products. These include quantitative research and technical research.
Fundamental research
Fundamental research takes a dive into a companys financial statement as well as industry trends to extrapolate investment decisions. There is no clear-cut way to conduct fundamental research but it normally includes building detailed financial models that project items such as revenue, earnings, cash flow and debt balance. Some asset managers may focus solely on earnings growth, whereas others may focus on returns on invested capital (ROIC). It is important for the candidate to understand the firms investment philosophy. This can usually be achieved by doing research on the companys website. It is important to note that although some firms have clear-cut investment philosophies, others may not. Aside from building a financial model, the fundamental research analyst will read through company FSA filings, talk to company management and sell-side analysts and visit company facilities to get a complete perspective of the potential investment. How analysts go about this often differ. Some researchers feel comfortable with only the resources at their desktheir computer, internet and phonewhereas others refuse to make investment decisions without face-to-face management meetings and visiting the manufacturing facilities. Fundamental analysts will also conduct industry research and determine how each company will gain or lose from their findings. For example, a fundamental analyst covering the defence industry will want to make projections on how fast the UK defence budget may grow. Questions the analyst may ask himself or herself are: at what rate should I expect the UK defence budget to grow? Is the absolute level of spending sustainable? Which companies should benefit from the growth? Will it be companies that make fighter planes or companies that make aircraft carriers that benefit?
Quantitative research
Quantitative research is built on algorithms and statistical models that seek to extrapolate value from various market discrepancies or inefficiencies. The key difference between fundamental and quantitative research is where the analyst puts in the work. The majority of work for a quantitative analyst rests within choosing the parameters, inputs and screens for the computer generated model.
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Vault Career Guide to Investment Management, European Edition Financial Research Breakdown
These models can take on a multitude of forms. For example, a simple model that seeks to take advantage of price discrepancies in the FTSE 100 may split the 100 stocks between those that are undervalued, as determined by a low price-to-book multiple, from those that are overvalued, as determined by a high price-to-book multiple. The quantitative analyst would build a model that would screen for these parameters and would buy (or go long) the undervalued stocks and simultaneously sell (or short) the overvalued stocks. In reality, quantitative models are more complex than this and often screen for thousands of securities across a multitude of exchanges. Therefore, it is no surprise that those who work in this field often have PhDs in subjects such as maths and physics.
Technical research
Technical research is the practice of using charts and technical indicators to predict future prices. Technical indicators include price, volume and moving averages. Technical analysts are sometimes known as chartists because they study the patterns in technical indicator charts to detect future price movements. Over time technical analysts try to identify patterns and discrepancies in these charts and use this knowledge to place trades. Whereas fundamental analysts believe the underlying fundamentals (revenue, earnings or cash flow) of a company can predict future stock prices, technical analysts believe technical indicators can predict future stock prices. The skill set for technical research is very different from that of fundamental research. Some technical analysts rely solely on their eyes to spot trading opportunities, whereas others use complex mathematical indicators to identify market imbalances.
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Vault Career Guide to Investment Management, European Edition Financial Research Breakdown
amortisation; it is generally used as a proxy for cash flow. Fixed income analysts like a decreasing leverage ratio as it signifies less debt on the balance sheet and a greater ability to repay it, and they also like an increasing interest coverage ratio as it signifies the greater ability to service the outstanding debt. Breadth of coverage refers to the amount of companies and securities an analyst covers. Most companies usually issue only one type of equity security but could have several pieces of debt outstanding. The fixed income analyst usually would cover all of these debt instruments, each of which may have separate and distinct provisions that could alter their individual performances. Additionally, a company may have convertible bonds that can be exchanged for equity, which the fixed income analyst would typically cover. Sell-side equity analysts typically cover between 15 to 20 stocks and are expected to know even the most minutiae of details about each company. Buy-side equity analysts typically follow 40 to 70 companies. If a buy-side analyst makes a sizable investment in a certain stock, they are expected to know just as much, if not more, detail than their sell-side counterpart. Although coverage for equity analysts is typically broken down into industry subsectors (for example, airlines would be a subsector of the transportation industry), fixed income analysts often cover the entire industry (which could be over 100 companies). So, whereas there can be several equity analysts covering the transportation industry, there may only be one fixed income analyst. Debt markets are often less liquid than equity markets and do not trade on small pieces of information. Therefore, the fixed income analyst does not need to know as much detail about each particular company. However, should a buy-side fixed income analyst make a sizable investment in a company, it would not be surprising for them to know as much detail as an equity analyst.
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RETAIL FUNDS
Retail funds are investment vehicles for individual investors who are typically below the status of high net worth. Retail funds are also sometimes known as the retail division of asset management firms. They account for around a fifth of the assets managed in Europe. There are some interesting differences between the European and American mutual fund markets: according to The Economist, there are over 26,000 mutual funds in Europe, and just 8,000 in the United States. However, American mutual funds tend to be much larger than their European counterpartsthe US mutual fund industry has almost $10 trillion in assets under management, while European mutual funds manage just under $6 trillion. Retail funds are structured so that each investor owns a share of the fund; investors do not maintain separate portfolios, but rather pool their money together. Their appeal can generally be attributed to the ease of investing through them and the relatively small contribution needed to diversify investments. In the past 10 years retail funds have become an increasingly integral part of the asset management industry. They generally constitute a large portion of a firms assets under management (AUM) and ultimate profitability.
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Vault Career Guide to Investment Management, European Edition The Clients of Asset Managers
There are two ways that retail funds are sold to the individuals that invest in them: through third-party brokers or fund supermarkets and direct to customer. The size and breadth of the asset management company typically dictates whether one or two methods are used.
Direct to customer
Through an internal sales force, each asset management company offers clients access to the firms entire suite of retail funds. This type of sales force is very expensive to maintain, but some companies have been extremely successful with this method. Prior to the rise of brokers and fund supermarkets, direct to customer was the primary vehicle for investment in many retail funds.
INSTITUTIONAL INVESTORS
Institutional investors are very different from their mutual fund brethren. These clients represent large pools of assets for government pension funds, corporate pension funds, endowments and foundations. Institutional investors are also referred to in the industry as sophisticated investors and are usually represented by corporate treasurers, CFOs and pension boards. Estimates suggest they represent almost three-quarters of the assets under management (AUM) in Europe. In the UK, about 79 per cent of assets are managed on behalf of institutional investors, primarily corporate pension funds and insurance companies.
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Vault Career Guide to Investment Management, European Edition The Clients of Asset Managers
More conservative
Given their fiduciary responsibility to the people whose retirement assets they manage, institutional clients tend to be more conservative and diversified than retail funds. Unlike investors in retail funds, institutional clients have separately managed portfolios that, at a minimum, exceed 8 million. Also unlike retail funds, they are all exempt from capital gains and investment income. Institutional clients hold enormous sums of capital they must allocate to meet the needs of the beneficiaries of retirement assets. Consequently, the representatives hire multiple institutional asset managers across the full range of investment styles (these styles, such as growth stocks and value stocks, will be detailed in the next chapter).
Method of selection
Given the high level of responsibility associated with managing portfolios of these sizes, pension funds use a rigorous process for asset manager selection. In turn, asset management companies have built considerable marketing and sales departments to cater to institutional clients. The selection process typically works as follows: An institution, say a pension fund, issues a request-for-proposal (an RFP), announcing that it is searching for new investment managers in a particular style or asset class. Asset management companies respond to the RFP, elaborating on their history, products, services and credentials. Investment consultants are hired by the pension fund to help sort through the RFPs and narrow the list of firms to three to five finalists. The finalists meet in person with the pension funds representatives and further due diligence is performed before the winner is selected. Because of the sophistication of this process, there are many interesting professional jobs in the institutional sales, marketing and relationship management functions. If you are interested in the investment business, but dont necessarily want to participate in analysing and selecting portfolio investments, these are career paths that you may wish to pursue. In the mutual fund world individuals tend to select funds based on recent performance records and brand recognition. Institutions tend to select asset managers under a much more stringent and analytical process. Specifically, they use the following criterion: 1) superior performance record compared to competition, 2) length of investment track record, 3) continuity of the existing core investment team and 4) consistency in adhering to a specific investment style and discipline.
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Vault Career Guide to Investment Management, European Edition The Clients of Asset Managers
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Vault Career Guide to Investment Management, European Edition The Clients of Asset Managers
consultants play a much smaller role in the high-net-worth area than in the institutional side; only extremely wealthy individuals will enlist investment consultant firms to help them decide which investment manager to hire.
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GETTING
HIRED
Chapter 5: Targeting Your Job Search Chapter 6: Who are the Asset Management Employers?
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
After the initial telephone interview candidates will have to complete online verbal and numerical psychometric testing. Those who are selected will attend an interview, normally with an HR manager and manager or senior analyst.
The interview
Aside from understanding the industry and firms, cracking the interview is the most important step in landing the job. Here this guide will explore the most common questions asked of candidates during job interviews. The questions are segmented into three types: background, analytical/quantitative and personality/fit.
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
Next you need to plan how to position yourself during the interview. Think of an interview as a sales presentation in which the product you are marketing is yourself. You need to establish the points of your background and character that will make you the ideal candidate for the job. To accomplish this, we suggest the following: Know every detail on your resume Prepare answers to the common questions detailed below Expect the unexpected Practise repeatedly
Background Questions
1. What was your most significant accomplishment to date? It is important when answering this question to focus on an accomplishment that highlights the skills needed to be successful in the specific position for which you are applying. For instance, when interviewing for an investment research associate or analyst position, mention an accomplishment that required keen quantitative skills, problem solving ability and success as a team member. Be sure when answering this question that you provide tangible and measurable results to your accomplishment. For example, as a result, the company increased revenue by 10 per cent, or as a result, the portfolios performance exceeded its benchmark. 2. Tell me about a recent professional experience when you had to convince someone to accept your idea? The interviewer wants to know how effective you are at articulating your recommendations and in defending your opinions. This is an important part of being an investment professional. A great way to answer this question is to state whom you were trying to convince and why they opposed your point of view. Then highlight how you overcame this. For example: I supported my analysis by outlining and measuring the potential risks associated with the project. By clearly comparing the strengths and the weaknesses of the project, my boss saw the merit of investing in the business. Finish your example with measurable and tangible results. 3. What was the most important thing you learned in your last job and why did you leave? For those just graduating school this question is less likely, but for others it is quite common. When answering this question be positive, even if the story did not end happily. Think about how you can link the skills learned in your last job, to the relevant talents needed for the new desired position. 4. Why are you interested in the buy-side instead of the sell-side? This question is often asked to gauge your knowledge of the differences between the two sides of the business. Most interviewers are not looking for a specific answer, but rather a reasonable rationale. Acceptable answers might include references to closer interaction with portfolio managers, more input into the investment decisions and dedicated focus on performing investment analysis (instead of marketing and writing investment reports).
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
2. Industry analysis Number of competitors Growth of the market, i.e., impact of external factors such as the economy, news and customer demand 3. Analysis of the companys future prospects (new products, etc.) Analyse managements growth strategy Identify business drivers Does the company have the correct product mix to match future customer demand? Will earnings grow through cost controls, price increases, or unit sales increase? 4. Investment risks: it is important to quantify the things that can go wrong when determining a proper value for the company. Sensitivity to macroeconomic conditions Management succession Regulatory changes Changing operating input prices 5. Recent financial performance: stocks go up and down based on their performance versus expectations. For instance, if investors expect 25 per cent earnings growth and the company only produces 23 per cent, the stock price will most likely fall. Highlight company earnings and sales growth vs. the industry and expectations. Measure the progress of operating margins. Indicate market share gains. Identify any aspects that differentiate your opinion from the markets (i.e., if sell-side analysts expect EPS growth of 10 per cent and you expect 20 per cent, say why). 6. Financial valuation of the company (relative to industry comparables) Please see the valuing a company section of this book. Steps 1 to 5 are incorporated into the financial predictions used for valuing the company. 7. Summarise your investment recommendation. Some companies may ask for a full, written investment report, so preparing this type of analysis in a written form may be a good idea. The key factor to note is that this is not a consulting project or a company bibliography. The stock pitch should be concise and to the point, hitting only the key drivers that will dictate future stock performance. Quantify any points you are making whenever possible. For example, instead of stating that a companys competitive advantage is the patent protection of its product mix, you should state that 75 per cent of all products sold carry a patent that prevents competition.
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
3. A client in the 28 per cent tax-bracket has a choice between a tax-free yearling yielding 7 per cent and a corporate bond yielding 8.5 per cent. Which should he choose? What would the yield have to be on the corporate bond in order to be equivalent to the tax-free bond? You have to compare the instruments on the same basis to decide. Because the yearling bond is taxfree, you have to find the after-tax yield of the corporate bond and compare it. Take the corporate bond first and consider a one-year period for simplicity. Suppose the client invested 1,000 and earned 8.5 per cent. Of this 28 per cent will be taxed, so the clients gain is (1-t)y1000 = (1-0.28)0.085*1,000 = 61.2. This is equivalent to a tax-free yield of 6.12 per cent. So, as the yield of the tax-free bond is greater than the after-tax yield of the corporate bond, the client should choose the yearling. To determine the yield that will give parity between the corporate bond and the yearling, use the formula after tax yield on corporate = tax free rate or, (1-t)ycorp = ytax-free, then ycorp =ytax-free/(1t). For this example the yield on the corporate bond would have to be 0.07/(1-0.28) = 9.722 per cent to be equivalent to the tax-free bond. If corporate bond yields are lower than 9.722 per cent, choose the yearling; otherwise, choose the corporate bond as the higher yield will offset the cost of the tax. 4. What would be a good instrument to use to hedge a portfolio of preferred stock? As preferred stock is similar to bonds that never mature (perpetual bonds), the best hedging instrument would be a long-maturity, risk-free instrument such as a T-bond option based on long-term treasuries. 5. If you are buying corporate bonds, which is more speculative: A, Aa, Baa or B? B is the most speculative of these ratings. 6. If a client purchases a 6 per cent, 1,000 bond selling at a yield to maturity of 7 per cent, what is the amount of the semiannual interest payment? Yield is unimportant here. It is the coupon payment, 6 per cent of 1,000 each year is 60 or 30 every six months. Dont get confused if the interviewer adds extra information to the question. 7. How can you reduce the risk of a portfolio? You add instruments for diversification. Hopefully these instruments are not well correlated with each other, so overall they reduce risk. For equities, theoretically, you need about 30 different stocks for efficient diversification. There are many forms of risk: credit risk, liquidity risk, country risk, market risk, firm-specific risk and so on. You can also include hedging instruments: for example, if you own a particular equity, you could put options on it. 8. What is a warrant? Do warrants affect a firms financial ratios such as ROE? A warrant is a security similar to an option on a stock, except a warrant usually has a longer life (time until it expires) than a call. Warrants may often be attached to issues of preferred stock or bonds to make the issue more attractive to investors, because warrants offer the opportunity for some participation in stock appreciation. When the warrant is exercised, the owner pays the stated strike price in exchange for new shares of common stock. All other things equal, whenever a companys number of common shares outstanding increases, measures such as ROE and EPS should decrease, because the shareholders ownership is diluted.
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
Economic questions
1. What economic indicators do you think have the greatest impact on the stock/bond markets? There are many good answers to this question, but the best approach is to discuss economic factors that are currently having an impact on the market. The interviewer wants to know that you are well informed on current market dynamics. You should read several leading financial periodicals prior to any interview, such as The Wall Street Journal, the Financial Times and The Economist. Articles in these magazines will provide you with the current economic influences on the market. In general you should know that investment analysts pay close attention to weekly, monthly and quarterly economic reports. Announcements of these economic indicators have major impact on equity and bond market performance. The most heavily watched economic reports include: Consumer price index: measures inflation Unemployment: company labour costs and profitability are driven by the level of employment in the market. Gross Domestic Product (GDP): measures the growth of the entire domestic economy. Analysts use GDP to forecast the sales levels and profitability growth rates of companies. Unit labour costs: measures the productivity level of workers Well-prepared interviewees will know the current level, past trends and future expectations of each of these indicators. 2. Discuss trends in the industry that you previously worked in. This question is designed to gauge your ability to think strategically. In essence, the interviewer is asking, can you identify the: Strengths and weaknesses of the industry Level of competition Regulatory changes Impact of economic changes New innovations Industry threats The key points of this exercise are usually summed up in a SWOT analysis, which breaks down a companys strengths, weaknesses, opportunities and threats.
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
Where:
Rf = Risk Free Rate of the market (t-bills) B = Beta of the stock Rm = Historical stock market return Debt cost of capital (current yield) is often estimated as the companys after-tax interest expense divided by its book value for long-term debt. Once the cost of equity and debt are computed, a weighted average is used to determine the companys WACC. The companys market capitalization is used for the equity portion, whereas the market value of the companys bonds is used for the debt allocation. For example, assume that the companys cost of equity was computed as 14 per cent (using CAPM), the cost of debt was computed as 9 per cent, and the tax rate is 35 per cent. And assume that the stock market valuation of the company was 10 billion and the market value of the debt was 5 billion. Therefore, the percentage of equity financing would be equal to [10 billion / (10 billion + 5 billion)], or 66.7 per cent. Debt financing would account for 33.3 per cent of the overall financing, [5 billion / (10 billion + 5 billion)]. Therefore the WACC is:
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
WACC = [Weight of Equity * Cost of Equity] + [Weight of Debt * After-Tax Cost of Debt] or WACC = [66.7 per cent * 14 per cent] + [33.3 per cent * 9 per cent*(1-.35)] = 11.28 per cent
Personality/Fit Questions
1. Where do you see yourself in five years? This question is designed to test the career focus of candidates. When answering this question be certain to have reasonable goals that are well aligned with the firm you are interviewing with. For example, if you were interviewing with a firm that emphasizes a team portfolio management process, you would not want to describe your aspirations for being a star at the firm. You should also note that employees of many traditional asset managers end up staying at the firm for the duration of their career. While you can take comfort in the high level of career satisfaction this statistic suggests, also realise that if you are a career switcher or your resume shows multiple jobs, you should be prepared to show commitment to your future career. 2. What is your greatest reservation about working in asset management? This is one of those negative questions that you have to be very careful in answering. In essence, the interviewer is asking for your weaknesses. Be certain that your answer does not highlight a fundamental flaw that would be detrimental to your success in the position you are interviewing for. For example, I am not really good with numbers or I dont ever want to work on the weekends. 3. What are you most proud of? This is a great place to talk about extracurricular activities or personal interests. This helps the interviewer get to know you better. Be prepared to share interesting anecdotes that show a passion for the activities you have pursued. This is also a great place to highlight your abilities as a leader. Although the initial interview is very tough, its not the end of the road at most firms (although some will only perform two interviews as the whole recruitment process). Investment management is highly competitive, and as a result, the hiring process is extensive. After the interview candidates will be asked to attend an assessment centre where they will complete various exercises including more tests and a group fund management exercise. In the group fund management exercise a group of candidates will be asked to act like fund managers, to respond to economic developments by adapting their portfolio. Before the assessment centre you may be given a week to prepare on a company and will have to write about this company under test conditions on the day. The final round will normally include another interview with senior personnel as well as a presentation on a topic related to fund management. At some firms, such as Henderson, there will also be an interview with the CEO.
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Vault Career Guide to Investment Management, European Edition Targeting Your Job Search
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Category
Pure investment management company Divisions of investment bank/former investment bank Division of global commercial bank Division of insurance company
Examples
Fidelity, Capital Group Morgan Stanley Asset Management, JPMorgan Asset Management Deutsche Bank Asset Management
As you can see, most of the large investment management firms are actually divisions of broader financial services companies. However, in many cases, the asset management divisions are run as entirely separate autonomous entities. In other cases, the parent predicates the culture and focus of the business. As you explore career options in the industry, do your homework about the firms structure and understand how the division operates.
Specialist firms
Although the industry has shifted somewhat away from specialist firms, their role continues to be in demand because of the specific expertise they can provide. These firms are located throughout Europe and have relatively smaller staffs and vastly different cultures. As we have already said, sometimes smaller firms have the benefit of higher returns whereas companies with bigger portfolios can end up mimicking indices. Generally, the smaller firms do not actively recruit. This means its up to you to target each firm, research its specialty, and contact them directly.
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Vault Career Guide to Investment Management, European Edition Who are the Asset Management Employers?
Tier 1 complexes
Tier 1 complexes are mutual fund families that offer a complete or nearly complete range of products. They serve significant numbers of retail, institutional and high-net-worth customers, and will have at least 70 billion under management. These firms, such as Fidelity, are well known throughout the industry.
Hiring
These firms hire almost exclusively through recruiting at top MBA programmes or raiding other firms. Some will hire BA candidates, but usually only from a top university. Inexperienced hires will be brought on as junior research analysts.
Pros
Exit opportunities, both at graduate schools and within the industry High pay Superior access to companies and sell-side analysts Firms' diverse product lines insulate against downturn in your industry. Extensive travel required.
Cons
Bureaucracy Internal politics Extensive travel required.
Top-tier boutiques
Top-tier boutiques are firms that specialise in a particular flavour of instrument, industry sector or style. They are nationally or internationally recognised for their expertise in that specialty. A top-tier boutique will have between 3 billion to 70 billion under management.
Hiring
Top-tier boutiques hire in a similar fashion to gold-plated megaplexes. However, if their specialty is currently out of favour, an especially persistent but atypical candidate can sometimes obtain a position at a top-tier boutique.
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Vault Career Guide to Investment Management, European Edition Who are the Asset Management Employers?
Pros
Exit opportunities, both at graduate schools and within the industry Superior access to companies and sell-side analysts High pay
Cons
Occasional lack of support staff Extensive travel required.
Tier 2 complexes
Tier 2 complexes are large fund complexes that have a complete or nearly complete product line. However, they are not regarded as highly as tier 1 complexes or top-tier boutiques. They will often be attached to a bank (whether commercial or investment), insurance company or other financial conglomerate. Tier 2 megaplexes will serve mainly retail and high-net-worth clients.
Hiring
Tier 2 complexes are often scattered in their hiringhiring internally, recruiting at the undergraduate level at local universities and at the graduate level at both local and top-20 universities.
Pros
Superior access to companies and sell-side analysts Firms' diverse product lines insulate against downturn in your industry Good pay
Cons
Bureaucracy Internal politics Extensive travel required.
Old-line firms
Old-line firms are firms that often were started in the 1930s (or even before). They are generally value/fixed-income shops and focus on capital preservation. They will have a mix of old-money, very high-net-worth clients and local institutions.
Hiring
OLFs hire at top-10 and -15 MBA programs. Occasionally, they may also hire laterals from other (value-oriented) firms.
Pros
Exit opportunities, both at graduate schools and within the industry Superior access to companies and sell-side analysts Good pay
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Vault Career Guide to Investment Management, European Edition Who are the Asset Management Employers?
Cons
Bureaucracy Firm's stodgy philosophy may not appeal to you. Firm expects you to stay with them for many years and structures pay and advancement accordingly.
Hiring
The top-tier institutions prefer to hire MBA graduates who have spent a number of years (post-MBA) at a premier buy-side or sell-side firm, but who would like to reduce their working hours.
Pros
Exit opportunities, both at graduate schools and within the industry High job security Great benefits Less stressful environment and culture
Cons
Bureaucracy Focus is on asset allocation and monitoring, not in-house management. Relatively low pay Difficult to get active management jobs because of lack of experience
Insurance companies
Insurance companies often manage extraordinarily large sums of money and are the largest asset managers in the UK. This money is derived from policy payments and set aside against potential claims. Insurance companies have historically invested mainly in high-grade, fixed-income instruments.
Hiring
Insurance companies generally hire investment staff from local universities. Historically, insurance companies have been unable to attract many candidates from top university MBA programmes. Insurance firms will hire at both the MBA and BA levels.
Pros
High job security Great benets
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Vault Career Guide to Investment Management, European Edition Who are the Asset Management Employers?
Less stressful environment and culture Willing to hire non-Ivy candidates Good learning environment
Cons
Bureaucracy Focus is on high-grade, fixed-income. Low pay Low prestige Extremely conservative investment styles
Hedge funds
Five years ago, obtaining a job at a hedge fund would have required navigating through a labyrinth of networks and connections to meet the right people. However, as hedge funds have become much larger, recruiting has become more formal and closely tracks a similar process to retail funds and investment advisory firms. Hedge fund jobs are not necessarily more prestigious than other opportunities available. More importantly, the industry generally does not truly distinguish between a hedge fund specialising in, say, energy and a mutual fund that does so. Each fund will be judged according to performance, size, reputation and quality of personnel.
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Vault Career Guide to Investment Management, European Edition Who are the Asset Management Employers?
Any signs of nepotism. 5) Lists of degrees from unrecognisable universities and/or work experience at unrecognisable firms. 6) Missing periods in bios.
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ON THE
JOB
Chapter Chapter Chapter Chapter
7: Portfolio Management 8: Investment Research 9: Marketing/Sales and Operations 10: Days in the Life
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Portfolio Management
Chapter 7
Client
Account/Product Manager
Research Associate
Research Assistant
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Portfolio Management
This is the science of making decisions about investment, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance. It is, in essence, the business end of the industry, the department that pulls the trigger. There are four jobs that typically fall under this component of the firm: portfolio managers, portfolio analysts (or associate portfolio managers), portfolio manager assistants and, at some firms, portfolio implementers. University graduates often fill portfolio assistant positions, whereas individuals with many years of investment experience hold associate and senior portfolio manager assignments. Portfolio implementers can be hired straight from undergraduate degrees. MBAs are not hired as portfolio managers right out of business school, unless they have a lot of experience. Typically, MBAs who wish to pursue a career in portfolio management join investment management firms in their investment research divisions. After several years in research, MBAs will then have a choice: either stay in research or leverage their research experience to move into an associate portfolio manager position or broaden their experience by covering additional sectors.
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Cons
Always being graded on investment decisions Competitive, high level of scrutiny Limited client interaction High degree of focus, smaller accounts or sector funds
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Portfolio manager analysts are often instrumental in the process of screening for potential investments. Using the general strategy of the investment products such as market-capitalisation, earnings growth, valuation multiples or industry, the analyst screens all available stocks in the market to identify the smaller list that meets the portfolios criteria. The screened list for an active portfolio varies but typically ranges between 100 and 300 securities. Portfolio manager assistants then gather additional research for the portfolio manager to begin the process of fundamentally analysing the potential investment. Once investments are made, portfolio manager analysts are responsible for monitoring the reconciliation of the trades. In this role, they work with the operations staff to assure that the portfolio is properly updated and performance records are accurate. Most firms have separate operations departments that reconcile trades and produce monthly client reports. However, many of the smaller firms require their portfolio analysts to perform the operations function as well. You should be aware of this and clarify the exact job responsibilities when applying and interviewing for the job. Portfolio analysts also participate in the process of client service, although the proportion of time spent in this area depends on the client type being served. For instance, an analyst to a mutual fund portfolio manager would spend very little time on client service. Institutional and high-net-worth portfolio managers have fewer clients and they meet with them one to two times a year. Intermittently, their clients require vast and detailed investment reports and market commentaries. Whereas marketing helps prepare these formal presentations, the portfolio manager analyst plays a crucial role in collecting economic and market data for investment commentary and portfolio analysis sections of the report. The position requires a person who understands capital markets, is capable of meeting deadlines and enjoys working on multiple projects simultaneously. The downside is that the reporting and operational components of the job have a quick learning curve and then become repetitive. Furthermore, it is not the best place to learn how to really value companies. Rather you are being exposed to the years of experience that the portfolio manager possesses. Most importantly, portfolio manager analysts receive the benefit of seeing a broad picture of investing money across several industries, whereas research analysts typically get exposure to one component or sector. All in all, in the right setting, the position is a great introduction to asset management and a worthwhile apprenticeship to pursue.
Cons
No expertise in a single industry Less formal training process Some operations work Repetitive assignments
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PORTFOLIO IMPLEMENTERS
This position varies depending on which firm you work at. Portfolio implementers assist fund managers in their day-to-day trading. They keep an eye on capital markets to see how funds are affected and check the cash levels of a fund. If cash levels are too low or too high they will liaise with the fund manager to see what he or she would like to do. They also advise managers on corporate actions, such as companies paying dividends, and liaise with the trading desk if the manger wants to reinvest. Portfolio implementers also ensure the positions of funds are in strategic alignment. The role requires an understanding of capital markets, and many new hires in this type of role have economics-related degrees. Most also have to pass the IMC. It also requires excellent communication skills: fund managers are extremely busy so portfolio implementers need to be able to articulate themselves concisely, and extract any information they need effectively.
Cons
No expertise in a single industry Operational side Less formal training
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Investment Research
Chapter 8
The investment research segment is responsible for generating recommendations to portfolio managers on companies and industries they follow. Similar to the portfolio management segment there are several positions in the research hierarchy including analyst and, depending on the firm, associate. On the sell-side, senior analysts typically have three to five years of post-MBA research experience or six to 10 years of post-university experience (if an MBA was not pursued). On the buy-side MBA graduates typically occupy the analyst position. The research associate-analyst is typically a sell-side position. These positions are usually occupied for several years or until the candidate is deemed capable of covering his own sector. Both buy-side and sell-side firms employ university graduates as research analysts. It is typically a two- to three-year program that can lead to a more senior position or result in the associate returning to business school.
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Cons
Long hours (60+ hours per week) Steep learning curve Always being graded (on your recommendations) Difficult to earn respect from portfolio managers
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Cons
Long hours (60+ hours per week) Could be a lonely work environment with lots of time in front of the computer, especially at a smaller firm Repetitive assignments Significant data work
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3. Investment consulting:
These are the firms that advise institutions and high-net-worth investors on appropriate diversification strategies and which asset managers to hire. At the entry level you will assist on manager searches and data collection for multiple investment styles. It is a good introduction to the different firms and the dynamics of the industry as a whole.
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Vault Career Guide to Investment Management, European Edition Marketing/Sales and Operations
MARKETING SPECIALISTS
Marketing specialists are typically postgraduates, not necessarily with finance-related degrees. They are responsible for marketing different products to potential clients, as well as being a point of contact for current clients. A large part of the job involves formulating presentations to give to potential clients, as well as maintaining the accuracy of presented data. According to a marketing specialist at Schroders, To succeed in this role you have to be commercially aware, understanding what is happening in the markets and how this relates to the products we offer and how they are sold. Attention to detail is also crucial. After all, the clients see our work, as their business often depends on it, and we are monitored by the Financial Services Authority.
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Vault Career Guide to Investment Management, European Edition Marketing/Sales and Operations
Account, product management associates and marketing specialist pros and cons
Pros
Broad knowledge of all of the investment products in the marketplace Great professional atmosphere for people that like the industry, but dont want to be the investment decision maker Less hierarchical career path than the investment side More entry-level jobs than the investment side Lots of client interaction
Cons
Difficult to jump to the investment side Limited focus on building quantitative skills
Repetitive assignments
BUSINESS ANALYST
A business analyst is the meeting point for the front-of-house and back-office staff. A large part of the role involves understanding the needs of the front-of-house staff and implementing this on the technical side. They may process changes, maintain existing trading systems and investigate other systems that could be of benefit to the organisation. As a result due diligence is also a major part of the job. If the business side wants something implemented, the business analyst will investigate the risks and pitfalls involved.
RISK ANALYST
The risk analyst position is perhaps closest to the stereotypical role of asset management employees as number crunchers. A risk analyst will look at the organisations trades, what is happening in the market and ascertain the associated risk and exposure. This involves crunching a lot of numbers to see whether or not investments might work. Deal risk analysts will evaluate risk levels and price them into a deal structure; in essence, ensuring the fund doesnt pay over the odds for a deal that may encounter some problems. Risk analysts, normally employed in portfolio analysis, will normally focus on one industry or sector, such as real estate.
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Vault Career Guide to Investment Management, European Edition Marketing/Sales and Operations
SYSTEMS DEVELOPER
The role of systems developer varies greatly depending on the department they are employed in. Systems developers in one department may be responsible for the maintenance of one system specifically assigned to them. They ensure the system is running smoothly, fix any errors and look for any updates or developments. In another department, such as architecture and innovations groups that most big firms have, they may analyse a variety of new systems and technologies to find anything they think could aid the business. They will then carry out a proof of concept project, comparing the new systems and technologies with existing ones.
Business analyst, risk analyst and systems developer pros and cons
Pros
Really get to understand the components of the business and how they interact Opportunity to move around within backoffice and operational positions More relaxed than front-of-house positions, with shorter hours Client interaction Constantly dealing with new issues
Cons
Not as well paid as some front-office and research positions Steep learning curve getting to know how all different departments interact Prioritising a variety of simultaneous tasks can be tough Can prove difficult (but not impossible) to move to front-of-office business positions
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Q&A
What is your role?
I am part of a 2 year graduate program which entails numerous secondments to various departments within the firm, these are up to 3 months long for the more relevant back office departments but we do visit every department even if its only for a week. Currently my placement is 3 months with the Institutional Clients Department which is responsible for looking after both current and prospective clients on behalf of the investment managers, allowing them to focus on the investment process. This can range from the original response to RFP requests and the subsequent pitch right through to the regular visits made to clients all over the world. I have been given a comprehensive training schedule which includes many overviews on our various products from client contacts and product specialists. The fact that I am only in each department for 3 months does not seem to have had an effect on the scope of my responsibilities, the bulk of my day to day schedule at the moment is taken up preparing presentations for client contacts to use on their visits to clients. There is strict legislation dictating the marketing of financial services from the FSA so it is a rigorous process to ensure that this is adhered to at all times. I am also responsible for replying to consultants requests; generally this will be in the form of a questionnaire about the firm, often used to aid a client in their search for a new manager for their funds. Usually, these are very detailed descriptions of the firm, its people and its investment philosophy so it is a very useful area for me to become familiar with.
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Vault Career Guide to Investment Management, European Edition Days in the Life
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Vault Career Guide to Investment Management, European Edition Days in the Life
14:30 p.m.: Most days I will be given an overview on a particular area or training of some sort, usually on a one to one basis and from very experienced individuals. 15:30 p.m.: The remainder of the day is filled tasks such as responses to RFPs and consultant questionnaires. Any particularly light days are filled with various ad-hoc tasks or project work of some description. 17:30 p.m.: BG are very big on work/life balance so this is generally the latest I will finish my day which is great as I usually play one sport or another in the evenings. In the run up to exams I tend to stay for a couple of hours revision as the library in BG is the perfect environment. 18:00 p.m.: The great benefit of Edinburgh life is that I will be home and cooking dinner by 6pm without even having set foot on a single mode of public transport!
Q&A
What is your role?
I am currently working as the global healthcare analyst on our Global Research team. I am tasked with carrying out research on healthcare companies on a global basis, drawing conclusions from this research, and presenting my recommendations to the firms other analysts and investment managers. This research can either be about existing healthcare holdings or new potential buy ideas. I am also tasked with keeping up to date on important healthcare-related news flow (such as the passing of Obama Care) and medical and scientific advances and changes.
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Vault Career Guide to Investment Management, European Edition Days in the Life
into competitive dynamics suits my details-oriented brain and having the recommendations I make based on my research taken seriously by other investors (even the most senior) is incredibly rewarding.
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Vault Career Guide to Investment Management, European Edition Days in the Life
healthcare industry and company-specific research reports. This research could involve background reading on a company, working through the financial reports, speaking to the company management or investor relations, or speaking to individuals directly involved in the industry about the company and its competitors. Another important source of information are my colleagues at BG who have a myriad of experience and knowledge on a wide variety of subjects and companies. 12:30 p.m.: I tend to eat my lunch about now. I usually eat at my desk and get on with some reading or I may pop out to take care of any errands that need to be done. Sometimes on a Friday a bunch of us will go out for lunch, which is fun. 2:00 p.m.: Most of my afternoon is spent working on company-specific research reports and formulating recommendations which I will then present to relevant members of the firm for debate. Sometimes I will have a meeting or call with company management or with an industry expert. These typically last around an hour or so. 6:00 p.m.: Most nights I manage finish up about 5:30 p.m. and then head out to ride my horse, Polly. On the nights I ride, I tend to get home at about 8:30 p.m. and then have some dinner, play with my dogs and relax.
Q&A
What is your role?
My role is to provide support to the defined contribution investment relationship directors (RDs). The RDs work closely with our DC Investment Only clients, their consultants and prospective clients, and my role is to support the proactive servicing of these distinct groups.
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Vault Career Guide to Investment Management, European Edition Days in the Life
provides me with the experiences and gives me the opportunity to learn firsthand the skills needed to succeed in the sales and relationship space.
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Vault Career Guide to Investment Management, European Edition Days in the Life
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Vault Career Guide to Investment Management, European Edition Days in the Life
Q&A
What is your role?
After 2 years on the Business Operations graduate programme, I had to think about where I would like to be permanently placed. I decided that the Investment side of the business was where I really wanted to be, and 10 months ago I started in the Initiatives Team supporting the Investment Management Group. My current role is quite broad and essentially involves working on any kind of investment related projects ranging from product launches or restructures to process improvements.
What is the best thing about your job? The best thing about my role is definitely the variety. Each project is completely different to the previous one and it provides a great opportunity to learn a huge amount on a daily basis. The nature of the role also means that I interact with a diverse group of individuals on a regular basis ranging from operational team members to senior management and portfolio managers. What is the most challenging thing about your job? Having to try and get your head around some complex investment related topics can initially be daunting. However, as the nature of my role allows me to develop relationships across a broad range of teams, I always have the opportunity to engage with subject matter experts from these teams who are always willing to lend a hand. The friendly nature of the work environment is invaluable. What are the typical education requirements? The prerequisite generally is a degree. Fidelity also encourages you to complete some foundation level qualifications soon after you join. I've completed the IAQ and IMC, both of which have provided me with a solid grounding to the industry. How relevant is your education for the role? The broad nature of my degree certainly provided me with a solid foundation to the world of business and allowed me to develop my analytical, time management and communication skills. On the other hand, the finance modules I undertook gave me the opportunity to learn about investment concepts which I apply in practice on a regular basis as part of my role.
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Vault Career Guide to Investment Management, European Edition Days in the Life
Any advice for graduates looking at a career in investment operations? Obviously an interest in financial topics is crucial. Additionally, I'd say you need to be able to demonstrate a number of skills. You need to have an eagerness to learn, the ability to forge strong relationships, as well the capability to prioritise work in order to achieve some tight deadlines. Above all however, you need to be a self starter and highly enthusiastic. What is your favourite perk? The subsidised canteen at two of our offices is certainly a good perk. The quality of food for the prices certainly represents excellent value for money!
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APPENDIX
Glossary Valuing a Company
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Glossary
GLOSSARY OF TERMS
Active investor: Uses available information and forecasting techniques to seek a better performance than a portfolio that is simply diversified broadly. Asset: Economic resources owned by a firm that are likely to produce future economic benefits and are measurable with a reasonable degree of certainty. Examples include cash, accounts receivable and inventory. Balance sheet: States the firms assets and how they are financed. Includes sections on assets, liabilities and shareholders equity. Buy-side: The asset management firms that represent individuals and institutional investors. Capital expenditures: Expenditures to acquire long-term assets. CFA exam: A three-part exam that tests your knowledge in financial accounting, statistics, investment analysis, economic, ethics, etc. The exam is offered in June (and December for Level I) and is taken over the course of three years. Close-end investment funds: A closed-end fund is an investment company that is publicly traded. It raises a fixed amount of capital through an initial public offering. The fund is then structured, listed and traded like a stock on a stock exchange. Cost of capital: Opportunity cost of funds invested in a business; the rate of return that rational owners require an asset to earn before they will devote that asset to a particular purpose. Analysts often measure the cost of capital by taking a weighted average of a firms debt and various equity securities. Depreciation: The reduction in the book or market value of an asset. It is also the portion of an investment that can be deducted from taxable income. For example, a piece of equipments value is depreciated each year as its useful life declines. Ding: Not getting the job. The call you get after the interview that says, Thank you, but Dividend: Payment by a company to its stockholders. Exchange traded fund: A portfolio that can be bought on the stock exchange and costs much less than a traditional investment management firm. Fixed income: The opposite of equity. Fixed income investors invest in the bonds (or debt) of a government or corporation. Growth stock: Characterised as industry leaders that investors believe will continue to prosper and exceed expectations. These companies have above average revenue and earnings growth and their stocks trade at high price-to-earnings and price-to-book ratios. Technology and telecommunications companies such as Microsoft and Cisco are good examples of traditional growth stocks. Hedge fund: These funds are managed by aggressive investment managers, using strategies such as leverage, long, short and derivative positions in both domestic and international markets. The goal is to generate high returns, regardless of how long they hold on to a stock.
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Income statement: Describes the companys operating performance over a period of time. Initial public offering (IPO): A companys first public issue of common stock. Liability: Economic obligations of a firm arising from benefits received in the past that are required to be met with a reasonable degree of certainty and within a reasonably well-defined period of time. Examples include accounts payable and salaries payable. Market capitalisation: A companys value assigned by the stock market. It is the product of the current stock price and the shares outstanding in the market. Investment products are often classified by the level of market capitalisation that they invest in (ie large-capitalisation funds typically only buy stocks with greater than $1.5 billion in market capitalisation). Mutual/retail fund: A retail fund comprised of stocks is sold to investors through banks and brokerages, and is registered with regulators. Mutual fund supermarkets: Made popular by Charles Schwab. It is a common distribution source that offers hundreds of different mutual fund products to individual investors. Passive investor: Relies on diversification to match the performance of some stock market index. Because a passive portfolio strategy involves matching some stock market index, this strategy is commonly referred to as indexing. Present value: Discounted value of future cash flows. Private Equity: Investment companies that conduct buyouts of public companies to take them private. The plan is to delist them, reorganise, and bring them public again after they have been reorganised. Request for proposal (RFP): Statement issued by institutions (i.e., pension funds or corporate retirement plans) when they are looking to hire a new investment manager. Typically details the style of money management required and the types of credentials needed. Sell-side: The functions of an investment bank, which includes investment bankers, traders and research analysts. These sell-side professionals issue, recommend, trade and sell securities to the investors on the buy-side. Shareholders equity: The difference between a firms net assets and its liabilities. Specialty firms: Firms that focus on one type of investment management style, product or client type. Statement of cash flows: Summarises the cash movement of a company over a period of time. Value stock: Characterised as relatively well-established, high-dividend-paying companies with low price-to-earnings and price-to-book ratios. Essentially, they are diamonds in the rough that typically have undervalued assets and earnings potential. Venture capital: Private firms that throw money behind startup firms and small businesses that promise strong growth potential. These firms also provide technical expertise and managerial experience.
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Valuing a Company
In this section, the book will take a look at the most common ways of assigning a market value to a company, also called valuation techniques.
RATIO ANALYSIS
Equity analysts commonly use financial ratios as a way to value the stock of a company. Specifically, they use ratios to analyse a companys past and present performance and predict future financial results. Generally, ratios are evaluated as a time series over the last few years, as a comparison against other industry competitors or as a comparison against benchmarks. Ratios are derived from line items on a companys financial statements (balance sheet, income statement and statement of cash flows). Below are some common valuation measures used in evaluating companies in multiple industries.
Price Multiples:
Price-to-Earnings Current stock price / Earnings per share
Price-to-Book
Price-to-Sales
Price-to-Cash flow
Profitability Ratios:
Return on sales Net Income / Sales
Gross margins
Net income / Average of the last two years total shareholders equity
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Inventory turnover
Cost of goods sold/Average of the last two years inventory This years inventory purchases / Average of the last two years accounts payable
Solvency Ratios:
Debt to capital Total debt / Total capital (total debt + preferred stock + equity) Total debt / Total shareholders equity
Debt to equity
Step 1:
Calculate free cash flow for five to seven years in the future. Analysis is based on the financial projections made on the pro forma (predicted) balance sheet and income statement.
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Calculating free cash flow Net income + Depreciation and amortisation expenses + Year-over-year changes in deferred taxes - Year-over year change in net working capital (current assets current liabilities) = Cash flow from operations
Step 2:
Determine the terminal value of free cash flows of the company when projections become too distant in the future to predict. In essence, you are assigning a constant growth rate for the company beyond the years that you can reasonable predict (typically five to seven years). Terminal Value = last year of projected free cash flows * (1+growth rate) [The growth rate is usually based on the rate of inflation].
Step 3:
Discount each years projected cash flow and the terminal value to the present time using the companys WACC (the weighted average of the companys cost of debt and the cost of equity). Example of discounting five years of free cash flows Year 1 Projected free cash flow / (1 + WACC) + Year 2 Projected free cash flow / (1 + WACC)^2 + Year 3 Projected free cash flow / (1 + WACC)^3 + Year 4 Projected free cash flow / (1 + WACC)^4 + Year 5 Projected free cash flow / (1 + WACC)^5 + Terminal value / (1+WACC)^5 = Total present discounted cash flow value
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Step 4:
The discounted cash flow value is often referred to as the intrinsic value of the company. Analysts compare this intrinsic value to the stock market value of the company to determine whether the stock is over- or undervalued. If, Intrinsic Value > Stock Market Value, then the stock is undervalued (buy) If, Intrinsic Value < Stock Market Value, then the stock is overvalued (sell) (For greater detail on valuation including more formulas, sample questions and examples of the DCF analysis, see the Vault Guide to the Finance Interviews, the Vault Guide to Advanced and Quantitative Finance Interviews and the Vault Finance Interview Workbook.)
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BAILLIE GIFFORD
Who we are: Baillie Gifford is one of the leading privately owned investment management firms in the UK and currently has over 60 billion under management or advice. It is also one of the fastest growing firms in the sector, helped by an impressive investment performance record and an exclusive focus on investment management. We are active managers. Our basic aim is to achieve high returns for our clients and to beat their benchmarks. We have a highly analytical, research driven approach and build our portfolios from the bottom up. Why Baillie Gifford?: The firm has a unique partnership structure, being wholly owned and managed by its 35 working partners. This gives us several important advantages over our competitors, both culturally and commercially. We have a proven track record in graduate recruitment: 75% of our partners joined Baillie Gifford as part of our investment graduate intake. We believe that the recruitment and development of our graduate intake is crucial to the continued success of our business. Opportunities: Training programmes in Investment Management, Operations and Information Technology. Baillie Gifford is a meritocracy, so progress, both in terms of responsibility and salary, depends entirely on ability. The combination of the firm's consistent growth and our preference for internal promotion has provided excellent career opportunities for our graduates. What we are looking for: High achieving candidates who are looking for an opportunity to start their career in the investment management industry.
KEY FACTS
Salary: Highly competitive Benefits/Perks: Bonus, pension, employment related insurance and staff discounts. Number of vacancies: 6, Operations 3, Information Technology - 4 Number of Employees: 650 Locations: Edinburgh Internship: Yes, when July and August Degree sought: Any for Investment Management and Operations programmes. A related IT degree for the Information Technology programme
Application Deadlines: Investment 30 November 2010, Operations and Information Technology 31 December 2010, Investment Summer Internship 31 January 2011
CONTACT DETAILS
Contact Person: (optional) Address (HQ): Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Phone: 0131 275 2000 Website: www.bailliegifford.com
BALDERDASH,
gobbledygook.
Were not one of those investment management firms that will bombard you with financial jargon. Quite the opposite in fact, well keep it simple because we want to attract the best graduates from any degree background. What wed really like to talk about is development. We were one of the first investment management firms awarded the national 'Investors in People' standard. This speaks volumes about the quality of our graduate training programme. Do you understand what were saying?
KEY FACTS
Salaries: Highly Competitive Benefits/Perks: sign-on and annual performance-related bonuses, non-contributory pension scheme, private health insurance and discounted investment products and savings schemes. Number of vacancies: Graduate 20, Internships 10 Internship: We have two internship programmes. We have a summer internship within Investment, which is a 9 week programme. We also have a flexible internship programme across our European business in either Sales & Marketing or Operations, which could last from 9 weeks to 6 months; depending upon your availability. Locations: We have graduate vacancies across the UK and Europe. Our UK vacancies are in London, Tadworth (Surrey) and Hildenborough (Kent). Apply: www.fidelityinternational.jobs/vault Language skills required: European language skills are desirable for all our business areas.
CONTACT DETAILS
Website: www.fidelityinternational.jobs/vault Address: 25 Cannon Street, London, EC4M 5TA United Kingdom Phone: +44 020 7283 9911
Fidelity is an equal opportunities employer and is committed to a policy of treating all its employees and job applicants equally.
Issued by FIL Investments International, authorised and regulated in the UK by the Financial Services Authority.
www.delityinternational.jobs/vault
INVESTMENT MANAGEMENT
EUROPEAN EDITION