Life as a Top Asset Manager
Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 3/24/13.
So I've seen a few posts lately asking about mutual funds, Asset Management gigs, and alternatives to the sell-side out of college, and hopefully my experience taking the asset management route to hedge fund rather than banking can help people get a better idea of what the expectations will be like.
Top Asset Management Firms To Work For
I'll be clear early on, I worked at the type of asset management firm that's tough to classify. I like to consider this class of AM firm as a "top asset manager" or a "boutique asset management firm" or something along those lines. In a thread about Third Avenue (one such asset manager), West Coast Rainmaker does an excellent job breaking down these types of firms and the major ones in one of his comments. Link to that is right here.
These funds tend to go unnoticed/unappreciated/unrecognized by the majority of WSO (and the majority of the younger crowd on Wall Street in general), and are markedly different from the likes of the traditional asset managers such as Fidelity, T. Rowe, Capital Group, Wellington, BlackRock, etc. that I sometimes lump into the "too big to succeed" category. Not that they aren't amazing firms (I'd happily have worked at most of them... not BlackRock though) but they, as West Coast Analyst phrased it, don't provide truly differentiated products in most circumstances. I'll try my best to identify the differences between these and top asset managers that I know of as I go along.
Take a look at the photo below from Three Bell Capital to get an idea of the benefits a boutique firm has to offer.
My background as it relates to AM, briefly: I spent 2006-2008 working for a top asset manager in an investment analyst role working strictly with concentrated long-term equity investments. I got this job through On-Campus Recruiting and think the reason I was able to get their attention was that I had been investing for a very long time and managing money for friends and family for a while, mostly in the same style as they did. Despite their notoriety in the investment community, I had no clue who they were when I interviewed there, and for some reason, I also think that helped during the interview process.
Benefits Of Working For A Boutique Asset Management Firm
Like any type of firm, there are benefits and drawbacks to working for a boutique asset management firm. I will do my best to lay them out for you here.
The Recruiting Process At A Small Asset Management Firm
- Research teams tend to be very small, tight-knit in terms of philosophy, and turnover is extremely low. The advantages to this are pretty clear: the culture does not quickly change and the groups are very friendly/ extremely willing to develop talent from within. That makes them very ideal places to start out. The drawback is also obvious then, as it's very difficult to get your foot in the door and actually find an opportunity to interview since most places are not frequently open to hiring.
- Recruiting practices make it hard to get a job right out of school: Some top AMs will hire through OCR and other direct-from-undergrad means, but most have ad-hoc recruiting practices. Sending out your resume can sometimes be all it takes if you catch them at a lucky time when they're open to hiring, but often they are only looking at certain target schools for their hiring when they need it or will take experienced hires from elsewhere. The key trait these firms look for is a previous appetite for investing (particularly in whatever their style may be) and a virtual certainty that investing is what you plan on making your long-term career.
- Interview processes for these firms are generally casual and very investment-oriented. The behavior questions I remember getting were pretty standard, but a lot of it was geared towards getting a feel for your personality as it relates to being a deep thinker and an investor.
One of the biggest differences I noticed between the recruiting processes of the top AMs and the traditional AMs was that the people at top AMs seem to be MUCH more like genuine intellectuals and learners than people at a place like Fidelity where there might be more of an established process and way of thinking that keeps everyone pretty much doing the same thing.
I had situations during my interviews where the PM interviewing me would literally pull out a pad of paper and start taking notes based on something he didn't know, that I did, about a company he wasn't familiar with or something. They genuinely want to know everything, and it's all very intellectual. Technicals aren't really a big deal per se, but having a pitch and being able to explain your thought process when evaluating a business is extremely important.
Most top AMs are long-term investors, so knowing how to look at a business through that lens is a big deal, much more so than being able to predict a 3-month catalyst that will get you 10%. They don't want 10% once, they want 20% annually for 40 years.
Culture At A Top Asset Management Firm
I think I've covered a decent amount of the culture within my recruiting rant - my apologies - but I'll quickly stress the things that I noticed compared to my experience at hedge funds or with people at traditional AMs. There's the intellectual component, then there's the stress on talent development (biggest plus to working at one of these places), and the last part that I haven't mentioned yet is another big one... most analysts at these types of funds aren't a very social bunch.
Watch the video below about boutique asset managment firms.
Autonomy is a huge part of the job, as the smaller the research team the more responsibility each analyst has to take on (and the fewer people to micromanage you). I can say that even two weeks into the job out of college I was meeting with clients who had separately managed accounts with us, grilling top sell-side analysts, and meeting CEOs for lunches.
These guys really gave me no time to grow up and put me right in the fire from day one. While I love this, some people might not be able to handle it but most of the time their recruiting practices select people who can. The downside to this level of responsibility/autonomy is that people aren't really spending any time during the day just chatting or being social.
Now, we spent a lot of time talking with one another about businesses and what we were working on, but we didn't spend much time hanging out outside of work (some of us did, but really not nearly as frequently as I do with my coworkers now) and there's not much room for personal life conversation either. Outside of the social aspect, it also sucks that you can start working on an idea and run with it for 3-4 weeks without a single person walking into your office to tell you it's a good or bad idea. Then all the sudden your PM might suggest moving on to another project and you've wasted a month on a single idea. So if you're not proactive in checking out your progress, you can potentially get fucked.
What's It Like Working For A Boutique Asset Management Firm?
The autonomy, like most else involving top asset managers, was good and bad. Now depending on who you are, the way it affects your actual daily work will vary. Right from the start (and even as an intern) we were all given the same job title as Analysts and had more or less the same general responsibilities. With such a small team and an enormous amount of ground to cover in the equity space, analysts are expected to source their own ideas and to do it well. From day one you come up with your own ideas, do your own research, and figure it all out on your own.
If you don't know how, tough shit, you're probably gonna get fired then. Asking for help isn't looked down upon, but it certainly will slow down your process and make you look a lot less desirable than someone who can put out solid research on a potentially-attractive business. We had an analyst start pitching a gaming company and I don't think anyone took him seriously for at least 3 months after that.
The talent at the level of most of the top AMs, particularly the PMs, truly tops on Wall Street in a lot of areas. Being surrounded by the kinds of investors who run these funds can be a huge bonus to your career in terms of developing into a smarter investor and piecing together the investment processes of multiple successful managers to form your own unique philosophy is worth working for them for free, honestly. I never really thought of my work as "actual work" because of how enjoyable it was working with these type of people, so it's hard to dive into specifics.
I could obviously write about all the stuff I did and it would take 90 pages, but that would be a waste... so I'll save questions for the comments and try to answer them as best I can if anyone has any.
Lifestyle Pros And Cons Of A Boutique Firm
This is the one area that I think really separates top AMs from their peers. Just about everyone in the firm, including the PMs, is in between 8:30 and 9:00 am, and out around 5:00 pm... with 6:00 pm considered "staying late" and 7:00 pm is an all-nighter. I never worked a weekend my entire time at the firm, and analysts routinely shot 4:00 pm emails to the research team to let them know they'd be working from home the next day.
As long as you get your shit done and you get it done well, nobody really cares where you do it, honestly. I've heard this sentiment echoed at other top AMs, but never at traditional asset managers. Another big difference is that the top AMs (probably just a function of smaller analyst headcount) usually have very flat structures where everyone is pretty much on the same level except the PMs, though even they tend to prefer their analyst duties to their PM duties.
So hours are great, you're typically treated very well by your coworkers, face time is nonexistent, and the only real way that I've ever seen analysts come in feeling like they hate their job or their coworkers is when there wasn't a cultural fit in the first place and someone fucked up in the hiring process. It's really a hard gig not to like, hence the super low turnover.
How Does Compensation Compare At Small Firms
My personal experience with compensation was that my firm actually paid a bit above what my investment banking buddies at top shops were getting all-in, but other data points and experience has me putting the typical compensation numbers at or very slightly above street level. Salaries tend to be higher than banking, but like most AM firms the bonuses are significantly lower.
At the end of the day, you're working basically a 9 to 5, so the slightly lower comp isn't gonna kill you and the exit opportunities are the same or better than banking if your ultimate goal is moving to a hedge fund or other asset manager that matches the investing style of your AM firm. In this environment, I would expect something like 80-90k base salary and a bonus in the 20-30% range for top AM firms, though it could be slightly lower if things have changed significantly.
My salary was higher than that and my bonus was slightly above the 30% mark my first year, but that was 2006. After a few years, those numbers go up pretty significantly, and I know for fact our highest-paid non-PM analyst (though he handled some separately managed accounts like most senior analysts) was getting all-in comp north of $3.5M, which you can't really complain about.
Summary
All in all, top AMs are an amazing place to start an investing career. An intellectual culture that wants their young talent to develop and succeed, an attractive compensation structure, very easy hours, and great excellent opportunities all make them highly desirable but extremely difficult to get hired.
I'll try my best to answer anything I didn't cover in the comments.
Read More About Asset Management At WSO
- AM VS. HF: The Business of our Business
- Asset Management VS Investment Banking: What Are They?
- Q&A- I'm An Equity Analyst/PM At An Asset Manager
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We were in the "diversification is for idiots" square, and as my boss used to always say, your best 6 ideas will be better than your next 100. We tended to invest less in the cigarette-butt value stocks and more in the high quality businesses at fair prices kind of value stocks that you could hold for 20 years and just know this is an excellent business that will keep compounding its earnings growth and give us a return for a long, long time. As for limiting what a junior guy can do, I don't think it necessarily does that. While we only held like 15 positions, every analyst is still looking at 1-3 ideas that aren't actually positions, and we research those extremely heavily before they get put into the fund, and the real reason why analysts stay busy is simply that the more excellent businesses you can identify, the better. If an analyst spends 2 months figuring out that XYZ Corp is an excellent business worth owning, but the stock doesn't get cheap for another 7 months and you end up buying it, that guy's 2 months were actually extremely productive. The more knowledge the better was always our motto.
Honestly after seeing the amount or grind and hustle that kids on this site have explained having to go through to get internships and full time opportunities, I almost resent my alma mater for how badly the ease of access to top jobs was taken for granted by a lot of students. I like to think I worked pretty hard and had a genuine interest in the jobs I was able to get as a result of going to a top school but a lot of my peers really didn't. So many intelligent kids went there because they knew they were smart and could go anywhere they wanted, and decided they might want to go into business because it pays really well, so they decide on Wharton because it's thought to be the best for business at the undergrad level. Then two years into their college educations they realize they never wanted it to begin with and either disappear into something retarded or end up swallowing their happiness and just plodding along into banking, taking the spots from much hungrier kids who actually wanted it 100x more. It's almost ridiculous, and I seriously admire a lot of the kids on here who will read the stuff I write and come back with some really great questions and seem to aspire to have the same opportunities that I had, which I totally took for granted. It really is amazing and I think we're going to see a shift at some point where the backgrounds of Wall Street are going to look a lot more diverse than they historically have. And I'd welcome that.
No, man, it wouldn't. It would be fucking gold.
Average age... maybe 23-24? Most places will either not give a shit whether or not you get your CFA, or they will really encourage it (e.g. T Rowe) and get you on track to get it right when you start working, so if you entered out of undergrad they'd probably help you to have it within 2-3 years. I don't know how much that helps you get to a PM role and I think your individual performance is obviously the bigger part of it. I'd say 8-10 years might be the average to get into an actual position where you're managing capital. Could be much earlier, could be much later depending on firm. I'm always biased towards equities because it's all I know and have ever done, but I'm sure fixed income can be great if that's your thing, and PIMCO is beastly obviously so they must be doing something right in the FI space.
Sorry, you're right I missed these, but not intentionally! Efficient market hypothesis is one of those things I'd heard about since freshman year of college in all my business classes and it seems to be academia's way of explaining the market into something of a science. I really hate that idea. If someone asked me what the split was between art and science in investing, I'd say it was 70/30 in favor of art. I don't have academic studies or keywords and finance jargon to back up my thoughts on EMH, but in my 6+ years of experience now, I've found that when you take all the people out there managing money, a good number of them absolutely suck at it. Put them all in front of the same 10-K, have them read it, and 90% of them will come away with a very rudimentary understanding of the business's potential problems or potential growth engines. There IS such thing as a superior manager, and there IS such thing as a superior company. So when you're in a position to pick some businesses for the long term that you think will outperform the market, and if you're a superior manager who knows what a good business actually looks like, it's very possible to do. In fact, if you happen to have this kind of skill, which I like to think people at my fund have, it's even easy. I can tell you if something is a good business in a week if you give me a few filings and a telephone. The hard part is finding the outstanding businesses and those tend to take months to finally get comfortable with. But look at the people who do beat the market consistently. Most of them follow this pattern. Long term picks, concentration in those picks, and intense research. All the information isn't out there and all the information isn't reflected in the price. Fear and irrationality are what make value investing possible, so EMH would put us out of business if it was 100% true.
Disclaimer: I'm not an academic, and I have no clue what the semantics of EMH are. In fact, I'm not even sure if I know what EMH is anymore. I've just started equating it to "you can't beat the market cuz the market knows all the same shit you do." I'd never rack my brain on something that academic or let it stop me from going after a career I enjoy. So that part of your thought process actually upsets me a bit, I hope that doesn't end up being the case for you.
Indices:
Most indices are weighted by market capitalization. When you buy an index fund today, the stocks that have the largest weight in your portfolio are the ones that have already outperformed the others, not necessarily the ones that will outperform in the future. The stocks that get dropped from the index are those that have underperformed the most. Obviously, it would be better if these weights were applied before the under or outperformance. People have proven that small adjustments to this methodology by making a passive portfolio weighted by dividends or cash flow (or some other valuation metric) can outperform on a risk-adjusted basis for a very long period of time. If someone is able to overlay value metrics with human judgment about the quality of the underlying business, the sustainability of earnings, and the awareness of major hurdles for the business, it seems to me like a recipe for outperformance. I certainly think being smart helps in this regard, but it is much more about being methodical and consistent in application than just pure brainpower. I’m sure Buffet is intelligent, but he’s not Einstein. He just applies his methodology consistently. (He has some other advantages now that he’s so established, but I won’t go there)
Time horizon:
Different investors have different time horizons. Some people are simply looking for a big pop in the next couple of months. Personally, I think trying to time events like that is bordering on impossible in most cases. However, if someone else has an eye for the long-term and is willing to stomach some interim volatility, they can rummage through the names that others are shunning or aren’t paying attention to. Things like spin-outs, stocks getting dropped from a major index, emergence from bankruptcy, and earnings misses are often areas for opportunity. Two investors with different time horizons might approach those situations from an entirely different perspective. The most telling period in my career was the late 1990’s. Stocks were skyrocketing, but for the most part, the worse the fundamentals of the company, the better it performed. Trust me when I say it was difficult to stick to basic value based strategies. People thought you ‘didn’t get it’ because you weren’t investing in many of these internet or cutting edge technology companies. We underperformed. However, in the early 2000’s when the market deflated, we actually had positive performance in 2000 and 2001 which was a nice vindication. People were starting to actually care about things like cash flow again.
Maximizing risk-adjusted returns:
It must be true that all or the preponderance of investors are seeking to maximize their risk-adjusted returns if EMH is true. In my experience, this is not the case. The problem is that most investors buy stories. By their nature, people are generally optimistic and are overconfident about the decisions they make. This means you have people overpaying for stocks like Facebook, Pets (dot) com, or some other unproven company, because people want to believe there is a parabolic growth story. They often fail to consider less optimistic scenarios and minimize outright negative scenarios. As unsexy as it may sound, avoiding investing in companies like these is half the battle. I would be curious to see how much an investment in the S&P 500 would underperform an investment in the same universe of stocks that excluded the 10% of worst performers. In other words, if you just avoided the Lehman Brothers, Enron, AIG, and other lousy performers, how much would you outperform? My sense is that it’s by a fairly significant margin.
I’m curious to read what others have to say.
Don't take my methods as "the way" to do it, but I do feel I have a few peculiarities that make the way I do things pretty efficient (for me, anyway).
I have, more or less, a pretty photographic memory. I always read Ks, Qs, broker research, transcripts, etc. cover to cover, preferably with my feet up on my desk and a highlighter in hand. Whatever oddities that go on in my brain for it to happen I'm not sure of, but after I highlight something I tend not to forget it. So I don't write a lot of notes but I highlight pretty liberally and one read-through of a K is usually enough for me to get all the key risks, metrics, and broadstrokes of the business down. As I go along the only thing I write notes about is bullet points on things that are major areas of concern/need more color that I would want to bring up in a call to IR or some sort of industry professional. I'm not a big skimmer of anything.
Nope, going along with my answer above, I would write down some points from the THI report that I might want to look into when I read MCD, but I wouldn't jump from one to the other and then back.
No, everything is paper. Paper reports, paper notes, paper everything. My office looks like this, and I'm not exaggerating: http://insanity.blogs.lchwelcome.org/files/2011/05/Carls-church-office… (also not sure how I found that picture but it's pretty accurate)