Ask a VP in Equity Research anything - 2018 Edition

ERorBust:

First of all, thank you for taking time to do this.

As someone who is beginning in ER this summer, is it feasible to expect to make a career in ER, or should I already be looking for exit ops for down the road?

I think it is feasible to make a career in equity research, but a challenge is that senior analysts historically stayed for a long time, so it was tough to get promoted to senior analyst. That could get harder or easier with MIFID depending on how things go. I would like to have a long career in the industry and believe I have a path to it, even with MIFID. That said, the industry may change dramatically in a few years... or it may not. Much is in the air.

You should always look at edit ops with any jobs. What attracts you to ER? Is it stock picking or investing? You may want to try to move to the buyside, and should consider that as an exit op. Do you like more of the client interaction side? Think about working in IR or even sales. Do you like the operations side? Going to a corporate is an option. You won't really know until you have a year under your belt

fine-nance:

With MiFid II already implemented in the UK, what's your bank doing in preparation for its adoption in the US (assuming you work in the US)? Do you have any backup plans for worst-case scenario?

I'm interested in entering ER in beginning of 2019. Would MiFid affect the number of associates getting hired in the US?

Thank you. Love the username by the way.

All US banks already have MIFID procedures in place because many of our clients have European businesses and have implemented MIFID globally.

In a worse case scenario, my backup is somewhere within the bank (ECM or investment banking) or working for a company. I could also do ER on the buyside, but that is honestly my third choice.

There are predictions that MIFID will lead to a significant headcount cut in research. It's possible, but I doubt it will be that drastic. Research headcounts are already down significantly (like many other areas of finance), and cuts now will really have an impact on the ability of banks to offer full coverage of equities. You need ER for both investing clients and ECM, so it is difficult to simply not have it. Many of the bulge bracket banks have kept their departments roughly the same size. I've seen some attrition from senior analysts at mid cap brokerages (some have left ahead of MIFID to go to corporates), but we haven't yet seen a broad scale cut. It could happen later this year or in 2019, but I would guess associate jobs will still be there.

bg944:

Thanks for doing this. I am 1.5 years into my role in a finance graduate program at BB (Think Product Control middle office type role). I come from a semi-target school near NYC. Passed L1 CFA this past December. Unfortunately my GPA is under 3.5 as I didn't fully apply myself in college.

I looking to move internally into ER at my BB. If not that then externally in ER at BB which would be much harder.

My biggest weaknesses are my GPA and the fact that I don't have prior modelling experience.

What steps would you recommend I take? I'm hoping to network within the firm and hopefully land an interview. I still need to prepare some stock pitches and read through technical interview guides. Ideally, i would like to create a sample research report to send in applications but not sure where to start.

I understand MFID II makes ER as a long term prospect less attractive but hoping that turnover will at least create more openings. If you could give your thoughts on MFID II's short term impact on ER that'd be great as well.

Should I avoid smaller research firms due to MFID II?

I would network within the firm and get your resume to whomever handles research recruiting and hiring at your bank. Come up with some stock pitches, keep track of the markets, etc. Modeling skills will be a concern - some senior analysts like teaching associates modeling skills while others expect them to come in with a skill base already. You would likely need to find a team where the senior analyst or someone else on the team would be willing to help train you.

bg944:

Thanks for doing this. I am 1.5 years into my role in a finance graduate program at BB (Think Product Control middle office type role). I come from a semi-target school near NYC. Passed L1 CFA this past December. Unfortunately my GPA is under 3.5 as I didn't fully apply myself in college.

I looking to move internally into ER at my BB. If not that then externally in ER at BB which would be much harder.

My biggest weaknesses are my GPA and the fact that I don't have prior modelling experience.

What steps would you recommend I take? I'm hoping to network within the firm and hopefully land an interview. I still need to prepare some stock pitches and read through technical interview guides. Ideally, i would like to create a sample research report to send in applications but not sure where to start.

I understand MFID II makes ER as a long term prospect less attractive but hoping that turnover will at least create more openings. If you could give your thoughts on MFID II's short term impact on ER that'd be great as well.

Should I avoid smaller research firms due to MFID II?

Not sure if it's very different in the US, but I myself had average grades and did a summer internship in product control at a BB in London. After the summer, I managed to convert it into another summer and received offers for both equity and credit research. So the move is definitely doable.

I have also heard from some people doing internal moves, such as one working in private banking, one being in financial reporting and moving to equity research. The key for both seems to have been the CFA exam, since it is quite highly regarded in the industry and my firm actually has us take the exam during graduate programs.

If you were to want to move to ER, I'd say the best would be to network your way in, while trying to get at least CFA level 2 done - it's the toughest and thus more recognized compared to level 1, and its curriculum focused on equity valuation is quite useful.

seen a guy from ops move to ER in a BB after a year or two. He just networked with the md of the group. had to do some pitches and about 6 interviews after that.

A few buy-side firms reached out to me through recruiters - I would explore them to an extent, but I haven't really gone through the interview process. Typically, people in ER that want to go to the buyside are making it known and are networking directly or through recruiters.

I wish more analysts (whether they are an "associate" on a team or a senior analyst) would mix it up with buyside clients a bit more when it comes to debating an idea - don't be afraid to challenge an investing client, as I believe doing that (when your arguments are sound) makes the client respect you more.

integratedRebuttal:

Thanks for doing this, these are really helpful. All these questions are specific to ER in Europe:

• Read that MIFID II allows for a 3 month "free trial period" where research can still be given out for free, any thoughts on whether there are going to be big shifts when that runs out in April? Similarly, I've heard a lot of teams are going to be given one year to "prove themselves" in the MIFID II world before the hammer drops and underperformers get culled, any thoughts on this?
• Read that GS Europe might switch to covering midcaps to differentiate, do you see teams at other banks who are outside the top 5 on II trying this and do you see it working?
• Read that JPM is planning to charge only 10 grand for basic research, way below other BBs. Any thoughts on that and do you see them taking significantly more market share with that strategy (good franchise + undercutting competitors)?
• How much cross subsidy do you see happening due to research's importance for ECM? Do you see banks like DB/HSBC keeping research headcount regardless of revenue to help ECM business?

Sorry for the battery of questions.

To reply to some of these points from a consumer of these services:

1/ The MIFID II trial thing is a regulatory way to stop constant free trials being given out. I think there may be big shifts in April but I don't see how any reasonably sized fund with a history will get away with paying everyone historically then getting everything for free for a quarter. From a consumer of these services, I'd agree that I can see the pressure from sell-side teams to be my number one and do regular calls with me just to update and log hours in their systems of activity to justify their existence.

2/ On GS, it has a large IBD and ECM franchise in Europe and that needs support. GS has some good teams in Europe but overall will probably not be hitting the top 10 lists of banks and this has to change. I have seen them bringing in talent from leading banks in Europe this year.

3/ JPM charges $10k but this simply gives you a basic login/Bloomberg enablement. The next level of their service (e.g. sales, models, spec sales, expert events) is not out of sync with other banks in a MIFID world.

4/ I'd agree with the latter but ECM issuance tends to be targeted in certain sectors which will likely be favoured e.g. TMT, business services, leisure, industrials, perhaps energy.

pktkid10:

Hey - thanks for taking the time. Three quick questions come to mind.

-Which research platforms would you recommend amid the current sell-side landscape
-What interview advice would you give someone that has a non-traditional background and no pedigree
-Aside from speaking with former employees, how would you gauge if the senior analyst is a good person/mentor

Thanks again.

1) The best bets are banks in the top 10 or so in the Institutonal Investor ranking and banks in the top 10 or so of the equity capital markets league tables. Also banks that generate the most cash equities revenues. In the mid cap bank area, banks that generate a high percentage of their business from cash equities or ECM would the best bets. Banks where equities don't seem to be essential to the strategy are the most at risk.

2) Network and show an interest in stock picking. If you can start studying for the CFA and pass level 1, that could help you get your foot in the door as well

3) Seniors that take the time to sit down and train you are the best mentors. Some seniors are more focused on what you can do for them when it should be a balance

chimp_g:

Thanks for doing this.

1. Have you started to study for the CFA or are you not really considering it at this point? What are your thoughts on getting a MBA?
2. What is your team structure?
3. What are your general thoughts on the buy side vs. sell side over the longer term and which side do you think will be able to whether the various headwinds (fee pressures, flow to passive, mifid, declining trading volumes, etc.) better?

Yes, I am particularly interested in the flow to passive. It actually concerns me so much that I am inclined to avoid asset management roles altogether.

Is a career in asset management viable in the long run?

1) I have not started the CFA - by the time I could do it, I was busy with work and had a few other things going on in life, so I couldn't devote the hours. I would never rule it out, though

2) Won't get too much into specifics, but most equity research teams have a senior analysts and two to three junior analysts. The junior analyst may or may not specialize in certain areas of the coverage universe depending on how big the coverage universe is.

3) When I have meals or drinks with friends on the buyside, we wonder when the industry will reach an equilibrium... All stock investing cannot go to passive and or electronics because an efficient market demands analysis to figure out valuation, trends, etc. However, there probably still is a ways to go in the move towards passive. To my amazement, flows to hedge funds remain pretty healthy, and people still plow money into 401Ks (which invest in mutual funds). But fees and pay will go down. Same as on the sell side - I think the industry will see a bit of a shaking out with MIFID, then be pretty stable from then. Overall, there is probably some more pressure on the sell side, but you need to figure out if you prefer to be on the sell side or buy side and choose a career that way, not on where the pressure will be

A lot of firms hire MBAs to fill associate roles. Some senior analysts prefer associates with MBAs and some actually prefer their associates NOT have MBAs (some think MBAs want to take on more responsibility too quickly). A lot of equity research hiring is really driven by senior analyst preference, more than most other areas of finance.

1) Fixed income research is a broad category. I am most familiar with credit research, but macro, commodities, FX, etc are obviously important.

2) MIFID does impact fixed income research as well, but in all honestly I am less familiar with how managers account for fixed income research payment, so I can't offer much help there.

3) Equity research analysts tend to publish more research pieces overall. Fixed income analysts tend to have more day to day interaction with traders. I can't help on which areas are more desirable than others - I would guess whatever area the bank trades the most.

4) I know of many credit analysts that have moved to the buyside. Recruitment should be the same as equity research - clients may reach out directly, you may go to recruiters, etc.

DP33, I am in no position to give ER to buy-side related advice. However, in terms of lateraling, here are some points to think about (I am in a similar situation).

Reasons to leave:
1. You would rather cover TMT than your current sector
2. Broader focus is better for the buy-side / exit opps
3. BB / top-10 is better for the buy-side / exit opps
4. The analyst's credentials are important, but you need to make sure that he / she will actually help your career. If you think they will, then good
5. Your company would not think twice about letting you go, so be selfish (but make the transition easy for team)

Reasons not to leave:
1. You received a solid sign-on bonus that you want to keep
2. Your Analyst is a "nice house in a bad neighborhood" - meaning he / she is a stud but for some reason is at a lower MM firm
3. You plan on leaving the top-10 firm in less than 2-3 years
4. You're only reason for leaving is more $
5. If your niche focus is a high-growth industry

I'll throw my 2 cents in here. You'll get 10 different answers from 10 different analysts with these questions, but generally speaking (from perspective of associate):
- The more accounting knowledge the better but it's not something you can't learn or improve in on the job (google is your friend).
- I've used current models as templates for initiations in the same industry. A company with different drivers than any of your current models will require more custom work on the driver tab/s but there should be ample IS/BS/CF templates from other models that would only require minimal edits.
-This will entirely depend on the analyst. Some pay a lot of attention to forecasting the balance sheet, others will plug numbers to get it to balance. The difference in detail from my models to those on others teams is very wide and depends on industry as well.

GS IR is garbage - II rankings are your go-to metric

Hank_xiv:

Thank you for taking time to answer questions.

i. With the recent implementation of MIFID II, do you see an increasing concentration of investment research in "go to" banks with historical reputation for outstanding research quality (and simultaneously shrinking IR at less reputable banks)? Meaning it will be good for the former and bad for the latter?

ii. How would you spend time preparing for an internship in equity/ macro research? What do you think are the key skills to be successful?

iii. Based on your experience, how does equity research compare to IB in terms of hours and stress? Obviously I expect long hours, but could you give some rough estimates (daily, weekends, etc.).

iv. Any views on Goldman Sach's investment research arm (any league table to recommend for IR/ ER)? Although the brand is strong, how does GS compare to other BB for IR? How would you rate exit ops?

Sorry for the long questions and thanks a lot in advance for the precious help!

1/ I'd expect my budget to be concentrated on five key providers where I get an exceptional service. Big banks have large balance sheets and ECM franchises so can invest for a certain period. I'm already seeing cuts across the street in Europe. There are five big winners in Europe that I see.

2/ If you know the industry, read as much as possible so you can try to work out what is important. I'd ask the team you're joining to send you their latest deep dives so that you can really get to grips with their views. You're there to help them do their jobs and add value to their clients - remembering that you have two ears and one mouth is pretty important too.

3/ ER - depends on team. Normal hours are somewhere between get in at 6-7 and leave at between 6 and 8 in the evening. Earnings will be way different as will if you are working on a year ahead or deep dive report ahead of marketing.

4/ GS is improving in research I think but is still some way behind the leaders (Exane, UBS, MS) in Europe. The exit opportunities are still good given where I see GS people going but every hiring decision is person specific when you're exiting to the buyside. Buyside teams are small - it is more about can I work with this person going forward.

1) MIFID can go a lot of different ways. My assumption is that "Top 10" research houses gain more market share. How you measure Top 10 is debatable - is it II rankings? Is it the research firm that covers the most IPOs or equity offerings? Is it the research firm at the banks with the biggest cash equity revenues? These lists overlap to some extent, but there are some firms that are in some of these categories but not the others. I think boutiques may struggle a bit.

2) I don't know much about macro research, but I would guess I would be reading all of the news on current exchange accounts, trade balances, different GDP growth rates for different areas, monetary and fiscal policy, etc.

3) Generally, IB analysts work about 10-15 hours more than ER analysts. ER analysts will have to be in very early during earnings season and may stay very late. In addition, during times when the team is working on projects like initiations or in depth reports, hours may be long.

4) As some have already pointed out, GS has usually been ranked lower in the Institutional Investor rankings than the pedigree of the overall bank would suggest. However, GS does do a lot of equity offerings, and they pay their research analysts probably a bit more than average. They also do offer pretty comprehensive research. I would consider GS "Top 10" in the matrix i described in bullet one.

I'm not as pessimistic as you. It comp truly does decline to just a normal corporate job, then that would be tough. However, I'm seeing a lot of guys in their mid 30s that are being paid up decently and are being poached at good salaries to move banks. A VP/Director level analyst can still make $400k or higher if they are are up and coming, with more upside if they do better. And frankly, if you are at that level, the hours are relatively good compared to banking, there is travel (which some people like), etc.

The race to get out of equity research can also have costs, like loss of deferred comp, loss of built up industry contact list and knowledge base (if you switch sectors, etc).

Basically, my view is wait a couple of years before we get too dire

What greener pastures are there to go to after 1-1.5 years in ER? I know the typical exit ops, just curious what other jobs you think would value that amount of ER experience?

If that is all you think ER is good for now (I don't necessarily disagree) why would anybody out of college choose to go in ER when a similar amount of IB experience has the potential to open doors to a great variety of opportunities?

So the obvious solution is to be #1 or #2 in II :)

Look, in both of my AMAs, I've been pretty clear on the issues facing the industry. However, as someone who has been in other areas of finance, I legitimately enjoy my job and feel like I add value to my clients. I intend to stay in it for a long time, and if the industry still exists, I would recommend my particular job to others

This is right on. No matter your rank it's bad.

Yes. Some guys at the up and coming director make 400. And yes some guys make 1m. I have made that. For last 15 years. I expect thay to become 600. Then 400. Then I'm done. This could completely change the job to a journalist. And I'm not come lower level associate. I know every big buy side client and get paid by them. It's over as we know it unfortunately.

I have seen it done. Typically with a demotion (but it is well worth it)