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Observations of an Equity Research Associate
 

IamObama's picture
ER
(Gorilla, 621
 
Points)
 on 6/20/12 at 8:00am
market-research.jpg

This is just one of those threads, where we talk about what the ER industry is like. I'm a first year associate at a BB in ER, and I just finished my 2nd week. I'm working under a group that I really like and I thought I would create this thread to help those out who want to understand the ER industry.

But I'm going to approach this thread from a different perspective. Instead of being a straight Q&A, I'm going to talk about things I thought I knew about the industry or what my perception of the industry was and how that compares to reality. Of course, feel free to ask questions at the bottom. I'll update this as I go along into my new role and I learn more thing.

Perception #1: ER is a cost center and the first one the be laid off.

Reality: ER is not a cost center and is one of the biggest reasons your bank will generate trades from the buy side and have them use your services versus the competitor. The ER department is one of the most useful services for a buyside firm from a sell side firm, so its essential to the success of a BB or any broker for that matter. Therefore, it is not a cost center, it just generates revenue indirectly.

Also, if you are an II ranked analyst, chances of you getting laid off are pretty low. If headcount needs to be cut, the analysts that will be cut will be those that are not II ranked or are generally not seeing a lot of trades in their sector by clients. II rankings and how your bank is trading a particular sector matters a lot when deciding who gets laid off or not. So if you are an associate going into ER, try to get into a group with a II ranked analyst.

Perception #2: Sell-side analysts live and die off the financial models.

Reality: Depending on your analyst, models are more or less used just to create an EPS number and a price target. It is not the real value add by the sell side analyst to the buy side PM because the buy side PM has a buy side analyst who could do the same thing.

The value add of the sell side analyst is to provide the buy side firm with a different perspective on the stock and get color on companies from their industry contacts. Buy side doesn't care what your rating or your price target is. They care to a degree what your estimate is and they care a lot what kind of perspective you are giving them (generally its something out of the ordinary) and what kind of legal information you can generate from your contacts.

Also, analysts typically don't build models. In fact, analysts are rarely in the office. An experienced analysts job is to meet with clients, entertain, meet with industry contacts, entertain, visit companies and their subsidiaries, visit conferences, host conferences, figure out different perspectives on your companies, and figure out what your next note(s) are going to be.

90%-99% of the modeling, analytic work is done by the associate. They are the number cruncher.

Perception #3: You don't work banking hours.

Reality: It depends on how big your team is and how much work your analyst wants to do. For majority of the associates, they come in around 7:30-8 unless they need to be on their sectors morning call. They also stay until 7-8pm. This is the average day, when you don't have a big note going out the next day or earnings aren't being reported etc.

On the other hand, if you are working for the bigger, II ranked analysts, your hours can be much more. These analysts tend to generate a lot more face time with clients, therefore they need to be constantly thinking of the next note or what else can they do to improve their perspective etc. So these analysts generally assign their associates a lot more work, so your average day can range from 7-8AM to about 9-10PM. If you have a big note going out the next day, you are likely in the office from 6:30AM-12/1AM.

So it really depends. Also the size of your team generally depends on if you are an II ranked analyst or the amount of volume your particular sector is generating in client interest. Again this is generally, but it could vary. I've so far seen the II ranked and top sectors with on avg 2 associates, but sometimes 3, and the non ranked analysts and those in the lower groups only have 1.

Perception #4: Sell side analysts research is BS and they don't know how to pick a stock

Reality: This again depends. Going in I thought most of sell side research was mediocre. But there are some really smart analysts in sell sides who really understand the fundamental dynamics of the stocks they cover. Also, a lot of buy side PMS were at one point sell side analysts who were usually ranked or close to. But there are some really smart guys in sell side research who really know their stuff. There are also some real big dumbass analysts who fit my perception of them going in.

Perception #5: The morning sales call must be so cool

Reality: No one goes to a morning sales call unless you are in sales or if your team is presenting.

I'll update as I go along and learn new things.

Tags:
Spalding Get Your Foot Off the Boat's picture

Thanks for opening this up -

 
Points)
 on 6/15/12 at 10:35pm

Thanks for opening this up - can you tell us a little more about your background and why you chose ER? I just wrote CFA Level 3, am applying to MBA programs this fall and considering ER as a means to move to the buy side.

Toronto's picture

Wow this is a great way of

 
Points)
 on 6/15/12 at 11:09pm

Wow this is a great way of sharing your experience. While Q&A is more personalized, I personally found this more helpful then reading through a whole thread.

I keep seeing the "II" thing a lot. Can you link something that helps explain what it is? I'm under the impression it just means "top analyst", and if so, where can I find the rankings online?

blueslord2910's picture

Great post! I am interested

 
Points)
 on 6/15/12 at 11:33pm

Great post! I am interested in seeing more your post.

Going Concern's picture

Great post. Would you happen

(King Kong, 1,701
 
Points)
 on 6/15/12 at 11:54pm

Great post. Would you happen to have the latest II rankings handy? :)

And I think it's gonna be a long, long, time

TEX's picture

IamObama: Perception

ER
(Monkey, 58
 
Points)
 on 6/16/12 at 12:49am
IamObama:

Perception #2:
Sell-side analysts live and die off the financial models.

Reality:

Buy side doesn't care what your rating or your price target is. They care to a degree what your estimate is and they care a lot what kind of perspective you are giving them (generally its something out of the ordinary) and what kind of legal information you can generate from your contacts.

Can you elaborate more on the legal information that contacts share with you? Are you talking about legal problems such as lawsuits or regulatory actions or something else?

Thanks for the post.

"Hope for the best. Prepare for the worst. Capitalize on what comes."

RGE's picture

Toronto: Wow this is a great

IB
(Orangutan, 315
 
Points)
 on 6/16/12 at 1:49am
Toronto:

Wow this is a great way of sharing your experience. While Q&A is more personalized, I personally found this more helpful then reading through a whole thread.

I keep seeing the "II" thing a lot. Can you link something that helps explain what it is? I'm under the impression it just means "top analyst", and if so, where can I find the rankings online?

II=Institutional Investor

http://www.institutionalinvestor.com/Research-and-...

Shorttermbuy's picture

The Institutional Investor

ER
 
Points)
 on 6/16/12 at 5:27am

The Institutional Investor survey is the Oscars of the equity research business.

Because there are literally dozens of houses covering certain stocks, its used as a barometer of how "good" an analyst is compared to the street. II is ranked by votes of buy-side firms with AUM weighting taken into account. So an II vote from a long-fund with $100B AUM is worth MUCH more than a start-up hedge fund with $0.5B AUM.

II ranks analysts by their sector teams, and there is also a country vote.

It's important because of a few things:

1) Raises the firm's value perception to buy-side clients
2) Testament of the firm's strong equities platform (and indirectly helps IBD)
3) Raises the profile of the analyst
4) Helps with recruiting talent

burnsy's picture

Awesome post. Eager to hear

 
Points)
 on 6/16/12 at 7:48am

Awesome post. Eager to hear more.

"All things are difficult before they are easy"
- Thomas Fuller

IamObama's picture

TEX: IamObama: Perception

ER
(Gorilla, 621
 
Points)
 on 6/16/12 at 7:36pm
TEX:
IamObama:

Perception #2:
Sell-side analysts live and die off the financial models.

Reality:

Buy side doesn't care what your rating or your price target is. They care to a degree what your estimate is and they care a lot what kind of perspective you are giving them (generally its something out of the ordinary) and what kind of legal information you can generate from your contacts.

Can you elaborate more on the legal information that contacts share with you? Are you talking about legal problems such as lawsuits or regulatory actions or something else?

Thanks for the post.

My legal I mean anything that is not insider information

IamObama's picture

Spalding Get Your Foot Off

ER
(Gorilla, 621
 
Points)
 on 6/16/12 at 7:38pm
Spalding Get Your Foot Off the Boat:

Thanks for opening this up - can you tell us a little more about your background and why you chose ER? I just wrote CFA Level 3, am applying to MBA programs this fall and considering ER as a means to move to the buy side.

I just graduated from undergrad..the only reason I got in is because I knew my team really well. I've seen people transfer over from industry to ER without a MBA or CFA etc, but its because they had good contacts at the bank. But if you have no contacts, an MBA or CFA is definitely needed, but I recommend a MBA over a CFA since banks of structured programs for MBA

Flake's picture

Nice post.

ER
(Neanderthal, 3,595
 
Points)
 on 6/17/12 at 4:19pm

Nice post.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

West Coast rainmaker's picture

Nice post man, SB for you.

ER
(Neanderthal, 2,072
 
Points)
 on 6/17/12 at 8:06pm

Nice post man, SB for you.

Human's picture

Great job. SB for you as

PE
(King Kong, 1,891
 
Points)
 on 6/20/12 at 9:22am

Great job. SB for you as well.

"I am the hero of the story. I don't need to be saved."

Moneyball's picture

Thanks for your post. I'm

ER
 
Points)
 on 6/20/12 at 11:34am

Thanks for your post. I'm pursuing ER, and this helps a lot.

Moneyball
See my other WSO blog posts

RainEllington's picture

Great post bud. I'm starting

ER
(Monkey, 42
 
Points)
 on 6/20/12 at 12:13pm

Great post bud. I'm starting as an associate in a week and have many similar preconceived notions about the industry.

grapefury's picture

I would actually say CFA >

(Baboon, 117
 
Points)
 on 6/20/12 at 6:28pm
Flake's picture

grapefury: I would actually

ER
(Neanderthal, 3,595
 
Points)
 on 6/20/12 at 8:12pm

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

John Rolfe's picture

Thanks for this...I was in ER

AM
(Orangutan, 361
 
Points)
 on 6/20/12 at 9:40pm
Reader54's picture

Hi, great post! Thank you so

IB
 
Points)
 on 6/21/12 at 11:32am
ILOVENYGUY's picture

Don't pick an industry, pick

(Orangutan, 343
 
Points)
 on 6/22/12 at 6:56pm
IamObama's picture

Reader54: Hi, great post!

ER
(Gorilla, 621
 
Points)
 on 6/22/12 at 9:24pm
IamObama's picture

grapefury: I would actually

ER
(Gorilla, 621
 
Points)
 on 6/22/12 at 9:28pm
IamObama's picture

Perception: You read a lot.

ER
(Gorilla, 621
 
Points)
 on 6/22/12 at 9:35pm
BlackHat's picture

Having been a glorified

HF
 
Points)
 on 6/22/12 at 9:51pm

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

West Coast rainmaker's picture

IamObama: YOU READ A LOT.

ER
(Neanderthal, 2,072
 
Points)
 on 6/23/12 at 10:56am
roar19's picture

I love how in just two weeks

ER
(Baboon, 108
 
Points)
 on 6/25/12 at 7:21pm

Smokey, this is not 'Nam, this is bowling. There are rules.

IamObama's picture

roar19: I love how in just

ER
(Gorilla, 621
 
Points)
 on 6/25/12 at 10:36pm
justanother's picture

Here are some tips from the

(Monkey, 50
 
Points)
 on 6/26/12 at 5:44pm
Flake's picture

justanother's post is

ER
(Neanderthal, 3,595
 
Points)
 on 6/26/12 at 5:49pm

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

burnsy's picture

SB for justanother if I had

 
Points)
 on 6/27/12 at 12:21am

"All things are difficult before they are easy"
- Thomas Fuller

Reader54's picture

IamObama: Reader54: Hi,

IB
 
Points)
 on 6/27/12 at 11:52pm

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