Big LOs

Can someone explain to me the appeal with Big Long Only funds (Fidelity, T Rowe)? Mutual fund outflows are only increasing and these big players have massive enterprises that need to get skimmed down. I understand the career is cushy, but I struggle with squaring that with the long term outlook

I get the Argument can be made about HFs as well, but at least the upside is a bit more material

I am just curious here for thoughts and perspectives so thanks in advance

 
Controversial

For one it’s actual investing, not the speculation game that Citadel/P72 plays. Also if you end up at a fund with a history of outperformance, especially during the 2010s, you’ll learn a lot. Important to filter out the RCGs of this world with horrible performance and try being at the funds where the people leading it are genuinely smart and thoughtful investors that adapt to changing market environments.

 

It's just an ice cold take... Analysts at P72 and Citadel don't "speculate". They combine rudimentary data processing with basic fundamental analysis to come to obvious conclusions but I wouldn't call that "speculating". BTW, I'm not demeaning their skill set at all I just think the analyses they run aren't what makes their job difficult, it's more like the mental toil & avoiding blunders & thinking through risk properly. 

What is "actual investing"? Does it only include long term "buy and hold"? Do you think Peter Lynch or Buffett wouldn't take an arb if they saw one available?  

 

Full disclosure, I'm at MMHF but moved from one of the top LO - I can tell you that even the very top LO is far, faaaar away from having that sacred "investing" skill you mention. Most investment theses and analysis is way inferior than a good SS ER analyst's insight, and not to mention given that esp the top ones recruit mostly right out of MBA most analysts' fundamental skillset in financial knowledge is laughable at best (I literally saw an analyst w near 10 YOE google 'what is amortization')... in my mind yes the comp and wlb is wonderful at those top LOs but it has absolutely nothing to do with the investment ability of the average analyst or PM who works there. They're just guys who went to a fancy bchool, struck lucky, and milking the sht out of it. I pick rel val number crunching based on structured analysis any other day rather than mulling about some porters five forces bs, which btw, is mostly mixing/matching what you scrap off from the sellside. Sure we can drool abt how investors there "made it" in life but you're just naive if you think their ability as an investor is in any way related to the perks of an antiquated business model that's alrd on its way to demise

Here's one food for thought: 

https://fundresearch.fidelity.com/fund-screener/results/table/overview/…

 
Most Helpful

Positive features from prospective analyst's perspective:

  • Much less key man risk than a single manager or even most multistrats
  • Much less risk that your job & net worth go poof because of 1-2 bad investments
  • Partnership and/or publicly-traded company models lend themselves better to participating in the company profits and therefore having your personal worth compound moreso than the annual mercenary model of most L/S funds 
  • Lots of people to network and learn from
  • Contrary to outside perception, the mutual fund businesses are still very much growing in terms of fees (check out Invesco, T Rowe, Franklin Templeton (all public)), especially fees per employee so while fee compression is important, it is still, and likely for the foreseeable future, less than the positive revenue tailwind of 8-10% long term AUM growth. Meanwhile, the passive to active flows that drove this fee compression are beginning to level out i.e. passive has already gone from 0% to 50%, who knows whether the plateau is 70% or 85% but its certainly not 100% therefore that headwind is probably in inning 6 or 7 at this point.

Negative elements:

  • Tenure / leveling up model means you have to put up with "get rich slowly" i.e. no real path to $10mm+ net worth in your 30's because you in all likelihood won't even be running your own product (which is when the real money starts) until you're 40.
  • IMO, a) the coverage model of analysts and b) the closet indexing diversification model most funds (not all, but most) pursues seem like a mediocre way to invest. It's impossible to generate significant alpha if you're more or less following the same process as every other fund in your category.
  • Lots of constituents = lots of bureaucracy, similar to working at a large bank

An Analyst seat at Wellington, T Rowe, Fidelity, Capital Group is still one of the best gigs on wall street and probably the single highest probability path to a $20mm net worth by the time you're 50 in the game. 

 

Also interested in some that take experienced hires (I.e. select equity) in how they compare to big LO shops. Also if there are others like select in terms of being LO + background of investors

 

Tenure / leveling up model means you have to put up with "get rich slowly" i.e. no real path to $10mm+ net worth in your 30's because you in all likelihood won't even be running your own product (which is when the real money starts) until you're 40.

I have noticed that the model is a lot more traditional in the sense that you need to put in your time. However, don't you think that (assuming you start as an analyst at 25) 15+ years to run your own product is too long of a timeframe? 

 

I’d echo the above. Most people come in as analyst in the 29-30+ range usually from MBA programs. I’d say the road to managing capital at a classic fund like Fidelity is close to 10-15 years of proving yourself as a analyst. It makes sense too, why would they trust somebody with less experience to manage billions of pure beta exposure. Positioning and risk adjust is one of the most  important things required to succeed as a PM and somebody with less than 10 years of experience just doesn’t have as much PM exposure or understanding diversified industries. 

 
 

In my opinion it doesn't. You still need juniors to ultimately fill the pipeline of seniors. The job is an apprenticeship. 

While not entirely apples to apples...I'd point to outsourcing of IB and MBB tasks to India. In the early 2000s (I'm sure there posts on here) people were saying those seats were going to crush analysts classes. They didn't. If anything it will likely just make juniors more efficient with time to do more analysis. 

 

Fairly obvious what the appeal is:

- Make very good money with decent career stability, interesting job (actual investing, researching companies), OK WLB. 

- You won't get fired if one PM loses money or decides he doesn't like you (unlike MM HF).

- There are headwinds for the industry, but T Rowe will be around far, far longer than the median HF career. 

 

Grew up with a parent at one of the big LO shops (Fidelity, Wellington, etc) so can offer some perspective on the pros -

  • It’s a great career seat. You rarely hear about anyone getting fired, especially once you’re a PM. You eventually get pushed out if you underperform in the long run, but it’s a far safer seat and a bad call (or more than one) doesn’t land you on the hot seat.
  • comp isn’t as variable as a HF but it scales very consistently and there is a much higher ceiling than many think. You won’t make 10M at age 30 but if you end up running a big fund comp can scale astronomically and well into the 8 figure range. And this is also driven off % of AUM fees, so you can just match your index and cash massive checks.
  • “long term” investments take the pressure off the playing quarters game and you have the ability to look at the 3-5 year range rather than 2-3 quarters.
  • WLB is impressive given comp. I would argue the absolute best seat in finance for $/hour worked.
 

Your reasoning could only be valid if : 

1) everybody could enter/pay a $150k MBA program

2) all MBA students could integrate a top LO fund right after the program

3) all analysts/PMs integrating a top LO post-MBA would be guaranteed to make at some point $5m+/year

4) the money you spend today has the same value than the money you'll potentially earn in decades

Lots of discounting factors "MMPM" but yeah !

 

I would also say be wary of outflow numbers, while the old expensive mutual fund share classes are getting outflows - many similar products structured as CITs, SMAs, ETFs are getting strong inflows (and yes many are active). They may be slightly less profitable for the firm and while active is shrinking on a relative basis to basis the headlines are overstated

 

I would say on a risk adjusted basis you will make more at an LO vs. HF and have a much happier life in general. Free time to see my kids, tons of autonomy without worrying about having to find another job and potentially move my family, etc.

My friends at HFs are jumping from seat to seat while my comp has increased steadily. My other friends at LOs are mostly all still in their seats 5+ years in.

Sure some of the HF guys have had longevity but 75%+ haven’t lasted more than 2-3 years in any one place, and it becomes harder to improve your situation over time the more you do it. I would be willing to bet that at this point any new analyst seat they get is paying guaranteed comp well below mine and their bonus will have to be great to push them above me. Seeing people who I know for a fact never considered going from SM to MM now taking roles at the latter signals to me that it’s their only option vs. they actually want to be in those strategies.

All in your risk tolerance. I love the lifestyle to pay aspect of this job and will have plenty of money saved by the time (if) things in this industry get to a point where I have to leave. I will not be worth $50M when I’m 40 but will have a few $M saved by then and when I detach myself from finance/WSO-think I realize that is wayyy more than I will ever need based on my lifestyle (though to be fair I’m not living in an expensive city).

 

This makes a lot of sense. Thanks for your input. Out of curiosity, what does senior analyst (7+years of buy side experience) look like at large LOs like Fidelity, Wellington? Does it continue to scale over time, like into your 40s and 50s? Strongly considering a move from PE over to LO

 

Can’t answer for sure bc I’m not at either of those shops, but would assume good analysts at those spots cap out around $1m max for top analysts at 10+ YOE (to be clear I’m saying YOE as an analyst so think late-30s through mid 40s age) and it stops progressing much beyond there. You’d have to make the step up to PM to exceed that is my guess. I could be wrong. Would be surprised to hear LO analysts anywhere are much into 7 figure territory. I honestly could be way off but that’s my sense based on my experience, idk.

I am in the ballpark of what you describe experience-wise (6th year as an analyst and 11 YOE total) and comp is hard to pin down precisely but should be in the $650-750k range this year depending on how fund does. I will have the opportunity to step up to PM in probably 5 or so years but I doubt my comp grows much beyond this point unless inflows pick up and my PMs feel generous. I am at a relatively well-known boutique with ~$1.5bn per IP if that helps.

 

The number of 7 figure LO analyst seats is quickly shrinking. Most funds are suffering from flow/fee pressure and are fighting this due to a strong market the last few years. There are a large number of sr analysts who make less than they once did and industry avg is likely closer to $500k than $1M. Good money for WLB but not what it once was and upside is disappearing at most firms.

 

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