Breaking into buy-side equity research - my experience

This will be my very first post to this forum, which is admittedly dedicated more to banking and private equity rather than investment research. Given the dearth of content on buy-side equity research (understandable given the small size/low turnover of the industry), I have decided to share my experience breaking into buy-side research from the sell-side.

DISCLAIMER Although I am personally a devout member of the value camp, I will be talking about long-term oriented fundamental investing in general. So when I write “buy-side research”, know that I will be referring to that instead of quarter-trading hedge funds (think the Citadel hedge fund family, Balyasny, etc) and the like.

Why would you want to work in buy-side equity research?

I can't speak for all shops, but in general, the work environment is very intellectually stimulating and the organization is very small and flat. Research teams in general number at most in the tens of people. Your work is about finding the truth the market doesn't see rather than trying to close the next deal. The market is the ultimate determinant of whether you are correct in the long-run, not whether or not you can trick the next idiot to buy your garbage (I’m very cynical about the sell-side). I will not be talking about life on the buy-side, because BlackHat wrote a very good post about it a while ago, and it still rings true today. I will note that his perspective is from that of a hedge fund, likely a fundamental shop (maybe a Tiger Cub), so there will be some differences between our comments.

If you like to think and analyze, to have a ton of autonomy, to have very reasonable work hours, to be very well compensated, and to work with a small team of smart, dedicated people, then buy-side research may be the right place for you (you results may vary).

What is my background?

I will be intentionally vague when it comes to personal information. I’ve recently started at a relatively small shop ($10B+ AUM, fewer than 10 people on the investment team) after having worked at a non-BB sell-side equity research shop on the east coast for less than 3 years after graduating from a non-target school. The entire recruiting process took around two years. This is because I was targeting a very specific niche within the already small buy-side equity research opportunity set: long-term value funds that outperform over full market cycles.

What was my experience like in sell-side research?

It’s pretty miserable. You’re basically marketing for stocks of your bank’s IBD clients. Sell-side research makes money through the traders (commissions) and through offering corporate access. Most people don’t really care about sell-side “insight.” When we weren’t running around like headless chickens during earnings season, we were scraping the bottom of the barrel on quarterly/monthly/weekly information with which we could spam up our clients’ (buy-side research) inboxes and voicemails with our “differentiated research.” I came in knowing that sell-side research is likely the best way to break into buy-side research, so I really just had to tough it out for a while.

Although the quality of research of our department wasn’t all that great, it was pretty clear to me that most sell-side research in general just sucks, be it from bulge brackets or from boutiques. Many initiations are no more than a rehashing of investor relations presentations with little to no value added. The industry itself is dying right now due to the overhang of MiFID being rolled out in Europe, which will be separating payment for sell-side research and commission payments for trade execution quality (normally when a sell-side shop provides research a buy-side guy finds useful, it is expected trades will be directed to the S&T department of that sell-side shop to “reward” them for the research).

Luckily, your targets are the very clients your department deals with on a day-to-day basis: the buyside research professionals that you spam email or spam call. The downside is that the people who tend to take sell-side opinions seriously are generally really bad investors (likely quarter traders) and you probably don’t want to work there anyways. However, there is normally some sort of exhaustive client database available where you can find the contact information of pretty much every single buy-side shop in the industry. This is where the real work begins: the networking.

Recruiting

Since the buy-side has such low turnover, especially for the good firms, how do you break in? In general, the larger shops tend to have established research associate (RA) programs for people with 0 – 4 (up to 6 or more) years of experience. However, at the end of the program, the RA is usually kicked out and is expected to go to either MBA, another shop, or leave the industry altogether. (Note that the hierarchy is associate, analyst, PM) This is because top level (analyst and PM) turnover is so low that there’s simply not enough room for promotions. Some shops that do this include: Brandes, Dodge & Cox, Hotchkis Wiley, Fidelity, Wellington, Putnam, T Rowe Price.

How would you break in then? I’ve found there are a few opportunities to do so:

• Right out of undergrad, either full-time hire or intern conversion (relatively difficult since the companies that do this normally recruit either with local schools or at “target” schools).
• Breaking in as a research associate after 2-3 years of experience (most frequently from sell-side research, but I’ve also seen bankers doing this).
• Analyst hire out of MBA as a career switch. This is very straightforward.

Networking

Like with any position in finance, networking is your best bet for breaking into this industry, I would say even more so than banking since by far the most important consideration on hiring you is cultural fit. When I say “cultural fit,” I don’t mean that bs buzzword that you bring up during your banking interviews, where every culture is just frat bro excel modeling. I’m talking about stuff like:

• Is research done slow-paced or fast-paced? How long does it take to vet an idea?
• Is the decision making based on a committee model or a star PM model?
• Do people prefer consensus building or a meritocracy of ideas?
• Is the quality of the ideas valued more than the rank of the person coming up with the idea?
• Is there more focus on breadth or depth?
• Are people siloed in their industry coverage or is there a generalist style sharing of ideas?
• Is there a collegiate environment? Are colleagues approachable?
• How do people react when they are proven wrong?
• What is the philosophy on risk management? Is it a critical component of the thesis or an afterthought?
• What is the orientation of the funds (absolute value, deep value, relative value, growth, GARP)?
• How much emphasis do they place on the qualitative side like management teams versus the quantitative side like modeling?

Networking as a way to find openings:

Networking is not only important to determine cultural fit, it is also useful to find openings! What do I mean by that? The problem with hiring, especially at a lot of smaller shops, is that openings are sometimes not advertised anywhere, even on their own websites! In fact, for my own position, I was referred by a director of research at another very solid buy-side shop who knew my current shop was looking for a junior hire. My strategy has been: **building out the professional network and making a good impression so when an opening comes up, you would be the first to know.** Your strategy should be to never let any door unopened, because the opportunity set is so small you cannot afford to miss out.

How to network:

How do you go about networking? The progression is simple and should normally go like this: cold email asking for a call, networking call with hopefully a referral, apply to opportunity and reference your contact. I won’t be going over cold emailing other than to say you definitely would want to personalize it for the company you are reaching out to. I’ve mostly been reaching out to RA’s rather than analysts or PM’s. Also, sometimes it could be helpful to reach out to someone not in research, especially if that person is an alum of your school. In fact, I’ve gotten interviews this way by asking them to refer me to the relevant HR person! You could also ask them to refer you to research personnel.

For the networking call, you should come up with very specific and targeted questions for your contact. Really get into the heart of their culture and the way they do things. Obviously you will get better at this and asking questions over time. You shouldn’t be asking things that could be asked of any company like: “what are your hours?” “what is your favorite part of the job?” “what do you think of the current market?” You would be better off asking stuff like: “you guys are a value fund, but you own Netflix. What’s the value thesis behind that?” “Although you guys have a star PM model, is there any leeway for questioning or challenging the star PM’s ideas?”

Hopefully, at the end of the networking call you have made a positive impression on your contact, and you should ask about either open positions, potential open positions in the near future, or referrals. ALWAYS have an “ask” at the end of the call, since otherwise you’d just be wasting your time. In addition, the conversation should also have revealed to you whether or not you would fit in with their culture, e.g. if you are a slow, deliberate thinker, you wouldn’t enjoy working at a fast-paced shop. Wash, rinse, repeat.
To attest to the power of networking, in my experience, I have been able to get at least a first round interview at 90% of the places I applied where I have at least 1 networking contact. And if you tailor your resume to buy-side investment research, you could even get a reasonable interview rate for places you don’t have a single contact.

Interviewing

You almost never interview with HR in this industry since cultural fit is so important. In addition, you should never get asked stupid questions like “if you could be a fruit, what would it be?” at least at any shop that you would want to work for. You also never get asked irrelevant behavioral questions like “tell me about any leadership experience you’ve had.” First round interviews are done over the phone by analysts. Then, if you make it to the next round, you would be interviewing onsite with many members of the team, including PM’s.

There are actually two types of interviews:

1) “Investing” interviews where the interviewers are interested in your abilities as an investor more than your technical knowledge and excel modeling skills; generalist shops always conduct these while industry coverage shops sometimes conduct these
2) “Coverage” interviews where they don’t really care about your investing skills since you’re going to be their excel monkey; these are industry coverage positions where all they care about is how well you know the industry and if you can do the modeling work

Objective of the interviewer:

I will go over the types of questions they ask, but first, I will discuss the objective of the interviewers. Ultimately, interviewers are trying to determine if the candidate possess the three necessary qualities for a great analyst (in my opinion and in no particular order):

1. Intellectual integrity – this is not just being honest, but having a love of the truth. This means being willing to admit when you are wrong and relentlessly pursuing the truth (not falling for confirmation bias, the bane of investment analysts). This quality also includes an insatiable curiosity. If you lack this but possess the other two, you’re a sell-side analyst, i.e. a sleazy salesman.
2. Analytical skill – having a love of the truth is not enough if you can’t arrive at the truth. As an analyst, you need to be able to synthesis information and draw conclusions.
3. Passion for investing – possessing the above two would be sufficient for a scientist, but to be a great investor, you need to love investing. It’s the passion that drives you to read boring filings and tread through massive datasets. It’s also this passion that translates your conclusions into actionable insights to inform the next investment.
4. Culture – this isn’t a quality, but this is something the interviewers want to know about to make sure you’re a cultural fit

Interview questions:

Below, I will list questions that you will almost definitely encounter in your “investing” interviews. Note that these are all behavioral, as 95% of your questions will be behavioral, with 5% remaining being brain teasers to make sure you’re not an idiot. I will number them 1 to 4 to correspond to the qualities listed above.

• What got you into investing? (3)
• What’s your investing style? (4)
• Tell me about a time when you were wrong. (1)
• Tell me about a book you’ve read recently (3,4)
• How do you approach valuation? (2)
• What is the process you use for due diligence on a company? (2)
• Tell me about something that’s not on your resume/what do you do for fun? (4)
• Why do you enjoy investing? What keeps you going when things get tough? (3)
• (If you’re in sell-side research) Do you disagree with your analyst on any names? (1)
• (If you’re in sell-side research) Are there any names you like outside your coverage? (1,3,4)
• What is your greatest weakness? (1,4)
• Why do you want to work here? (4)
• Who’s your favorite investor/which investors do you follow? (3,4)
• What do you think about the holdings in our portfolio? (1,4); I’ve once bad-mouthed one of their holdings and it turns out my interviewer was the one who had pitched it (and he’s the director of research)! I ended up moving on to the next round, so the intellectual integrity element is clearly valued!
• What do you have in your own portfolio? (3,4) This question may be tough if you’re in sell-side research, since there is very likely a substantial amount of trading restrictions on companies in your industry, which just so happens to be the area you’re most familiar with. I would recommend having a few names to talk about here, unless for some reason ownership of all stocks is restricted by your current employer.
• Pitch me a stock. (1,2,3,4)
• Any stocks you don’t like? (1,2,3,4)

The pitch

In addition to these interview questions, I highly recommend you have at least 1 fully developed pitch and corresponding report as a work sample. The pitch will be something to talk about during the interview and you will be referring to it many times to demonstrate and highlight your strengths. For instance, you can point to the model to emphasize your technical/analytical skills. You can also talk about how you’ve head to dive through thousand-page filings to find the information needed to create the pitch (showing your passion for investing). You can even talk about things you’ve learned during the due diligence process (displaying your intellectual integrity).

Customize the pitch:

Ideally, the pitch should be customized for the place you are applying to. I had two pitches at my disposal, 1 “buy” and 1 “short.” These should be comprehensive and fully developed where you can speak confidently on any concerns or questions the interviewer may have on the name. Consider it a representative piece of work you would put out if you were hired as an analyst and needed to make an investment recommendation to the PM. Naturally, since I was recruiting exclusively for value funds, both my pitches were value oriented. These pitches took me two to three months to create each, since the only real time I could work on them is during downtime at work or during the weekends.

Don't be stumped on your own pitch:

Before you even interview, make sure the interviewer has a copy of your pitch so you could highlight your strengths during the interview. If you have ANY doubts as to whether or not your pitch would increase your chances of getting an offer or if you are afraid the interviewer could conceivably poke holes in your thesis, go back and DO MORE RESEARCH. You should NOT be stumped during the interview on your own pitch. Know the bear thesis if you’re bullish. Know the risks to your thesis. Know the different angles of attack.

Your report should be however long it needs to fully develop your thesis. You can have an appendix if you want, but you should have all your hard hitting arguments in your report. I’ve heard some people argue that a 2-page report will suffice, and there’s truth to that suggestion. In fact, most interviewers don’t even read this report. However, you will know a shop is really worthwhile if they read your report and ask you targeted questions on it. Those are the shops that actually want to develop internal talent and are the ones that have an open-minded culture where the merit of the ideas matter more than the seniority of the person coming up with the idea.

You will likely be asked about any other stocks you like, so it may be good to prepare one or two additional pitches (no need for full report) where you know the general thesis and some risks. You will only be asked 1 question on these auxiliary ideas, in all likelihood.

Companies of note

Don’t bother with bank owned asset managers like GSAM or JPMorgan’s asset management arm. Also don’t bother with BlackRock – they are trash. I’ve never heard a single good thing about them nor have I ever seen one of their ex-employees at a better shop. This is absolutely not an exhaustive list, just the funds that are decently sized and have been around for a while. There are quite a few very solid boutique value shops around the country I didn’t bother listing since they hire by demand.

Fidelity – only hires out of intern conversion, out of undergrad (lots of Ivy Leaguers), and out of MBA. No chance of joining as an experienced hire if you’re pre-MBA; All the Boston research associates know each other (I mean across firms. So you should expect the Fidelity guys to also know the Putnam or Wellington guys). Frankly the quality of their research team isn’t that high. Although you get coverage immediately out of undergrad, there’s no real unifying philosophy on their investing.

Putnam – same as Fidelity. Even the research structure and culture are extremely similar

MFS – not a great shop, but probably one of the oldest asset managers out there; I believe they do hire out of undergrad

Wellington – has an undergrad internship program for women and under-represented minorities. Hires out of undergrad and experienced hires and MBA interns and post-MBA. Their Launch Research Associate is the relevant program where you get placed into a group and rotate positions/coverage. They have quotas for both out of undergrad hires and experienced hires (pre-MBA). Their onsite portion gives you 1.5 hours to prep a pitch on two names they give you (pick one) and then you’ll need to present in front of a committee. A nonsensical exercise.

T Rowe Price – Has undergrad/MBA internship, right out of undergrad, experienced hires, right out of MBA; no real culture, too big to succeed type. Their funds have so many holdings, they pretty much just do closet indexing

Clearbridge – Mostly growth strats, no real way in out of undergrad or at the associate level. Does do MBA interns and hires out of MBA. Has connections to Columbia

Fred Alger – Aggressive growth shop. Hires a lot of Yale people out of undergrad research associate program. Also experienced hire pre-MBA

First Eagle – well known shop, I don’t think there’s any way in pre-MBA

Ruane Cuniff Goldfarb – Sequoia Fund took a big hit after their Valeant debacle. Still a well-known name and highly respected value shop. Buffett recommends them. Don’t think there’s any way in out of undergrad; they rarely hire

Neuberger Berman – employees bought this group from Lehman Brothers during the crisis. Has many products including private equity. They have an “internal sell-side” structure, which is exactly as it sounds. Hiring at the pre-MBA level is by demand. No real upward mobility, and they are definitely a “coverage” interviewer. Expect the RA job to be very similar to sell-side RA in that you support your analyst with very little input.

Royce – famous small-cap value shop with strategies that run independently from each other. Almost never hires.

Tweedy Browne – old school international value. They very rarely hire and only at the post-MBA level

Davis Funds – founded by the son of the famous insurance investor Shelby Davis, now run by Shelby Davis Sr’s grandchildren, I believe. They do all industries not just insurance. They very occasionally hire post-MBA

Pzena – publicly traded investment manager. No way in pre-MBA.

Harris Associates – a top tier asset manager in Chicago, generalist structure, famed for their “devil’s advocate” procedure, with star PM Bill Nygren. Definitely a guy you should follow if you’re into value investing. They have domestic and international sides that run almost entirely independent from each other. EXTREMELY competitive to get a spot here. They recruit sophomore interns who have a chance to become junior interns who has a chance to become a research assistant (basically just does the modeling/support work). The research assistants work and compete with each other for a few years before one of them is promoted to research associate, where he would pick up a couple names as coverage. Now, the firm intends to develop and promote this associate hopefully to an analyst one day. Harris Associates also hires people out of MBA and post-MBA, though rare.

Diamond Hill Capital – a very fast growing value fund in Columbus. Has a relatively large team but also develops/promotes talent internally. Sometimes hire out of undergrad and pre-MBA experienced hires. Also sometimes take people out of MBA. Industry coverage groups.

Dodge & Cox – Takes junior interns and also hires people out of undergrad and experienced pre-MBA hires. Very occasionally takes MBA interns since they have extremely low turnover. Very old value shop using relative valuation. Committee decision making structure, though management can be very traditional and have a lot of biases. RA’s are kicked out within 4 years, though many people leave before then. Excellent placement into top MBA programs; you can be almost guaranteed to be placed into HBS, Stanford, Wharton, or Booth.

Hotchkis Wiley – Hires out of undergrad and pre-MBA experienced hires. Not sure about MBA hires. People generally stay around 4 years. This is a value shop with industry coverage.

Causeway Capital – Their differentiating factor is that they combine fundamental research with quantitative analysis. They do international value in industry coverage teams. They make experienced pre-MBA hires from time to time, currently building out their China coverage team. They do take MBA interns.

Brandes – International value shop run by Charles Brandes who retired 1Q18. They have a sizeable RA population that they hire out of undergrad and pre-MBA experienced hires. They run industry coverage groups. Also takes a good number of people for their MBA internship. Hires people normally starting in August as the school year starts – for both pre-MBA experienced and undergrad hires. If you’re a pre-MBA experienced hire, you would start in January whereas the undergrad hires would start in July. If you’re reading this post when I posted it, they should be starting their recruiting very shortly!

Capital Group – extremely hard to get in and very good reputation. They do make pre-MBA experienced hires but it is a buyer’s market for them since so many people apply there. Also their MBA intern program is extremely competitive and I hear they give maybe 1 full-time offer per year to MBA interns.

TCW – do take people out of undergrad and experienced hires. Don’t know much about them, but quality of research is likely low given I’ve never encountered any of their ex-employees at top shops.

Hope all of that help! Feel free to message me with any questions or post replies here. No guarantees I’ll resp
ond.