P: = Paul Mullen (Interviewer)J: = James (Equities Analyst)You can listen or download this interview by clicking this link:Equity Analyst Interview
Hello, and welcome to everyone.My name is Paul Mullen.I’m also known as Trader333 and I’m theContent Development Editor for Trade2Win.Today, I’m interviewingJames, who is an equities analyst working in London, so a very warm welcome toyou James.We’ll start straightaway byasking you what is an equities analyst, assuming that is what you are?
P: Right because they’re usually low volumestocks.
J: ? to cover the costs.Kind of explicitly, one accepts the researchis being written from the perspective of a corporate angle, which in theoryshouldn’t actually change the recommendation. I’ll move through buys and sells and hopefully, by being tactful withthe company, I can maintain a good relationship with the company through aperiod when I’m a sell on it.
P: This is the customer you’re talking abouthere, who actually pays you for this work?
J:It would essentially be hoping thecompany thought, ?Okay such and such a bank knows what they’re doing.They have a very insightful brokeringbusiness, a very insightful analyst,? therefore if they’re looking for acorporate brokering partner, ?this is someone we would want to do businesswith.?
P: Can I ask you a question?You said you have large institutions.Can you give me an example of an institutionthat may use your services?
P: I want toclarify something.You’re saying theselarge institutions have their own analysts, are they’re then subcontractingsome of that work to you, or are you just working with them to actually giveadvice on what the best thing is to invest in?
P: That’squite a lot, isn’t it?The reason I saythis is because I remember a model that the government were using to try andpredict economic forecasts, and at one point, they had something like aludicrous number of people involved in it, and something like 1,300 variables,and they still got it wrong.In theend, they actually reduced it down to a very small number and it was asaccurate as it was when it was a high number.Do youthink that 40 analysts looking at ? are you talking about 1 stock here or areyou talking about across a number of stocks? That’s a large number.
J:Yes, andvery often the analyst will have a background in the industry that they’respecialists in.Yes, you’ll have aseries of teams.Except for the juniorlevel, where obviously people move around for experience, if they come in, sayon bank’s graduate scheme, they might join one team and then move around asother opportunities come up.Obviously,that would be good to give a rounded view, but generally as you get moresenior, you either specialize or you come in at a more senior level becauseyou’ve actually got industry experience in a particular sector.
P: If noone’s buying them, that’s going to happen, isn’t it?
J:Yes, orthere is a particular catalyst.You’rewaiting for the market to sit up and pay attention, and that’s going to take awhile to come through.It doesn’t startwith the charts being cheap and therefore you having a buy on it but maybe thesales guy, for whatever reason is using a technical overlay to say, ?Actually,this guy is right fundamentally,? or we hope he’s saying this guy is rightfundamentally, but I’m not going to push that to my clients yet because I thinkthere is a bit of a delay or the chart doesn’t look good, or the stock looksover sold, –
P: So you’recombining a long-term thing.It soundsto me like if you do any real technical analysis on this, it’s more shortterm.Would that be a correctassumption?
J:Well, ina way it would be short term now.WhenI started in this industry a decade or so ago, fund managers, if you went tothe Fidelity end, the Threadneedle end, really for the long term, pension fundtype managers, they would be happy to take a view on a stock on a 1-yearview.One of the things that has beenvery interesting, over the last 10 years that has been very noticeable, is thatactually everybody is much more short term in their focus.I think part of that is probably driven bythe hedge funds, which is then the second category of clients I was going totalk about. If youdon’t have the hedge fund managers, who obviously A) are looking to sell shortideas as much as they are long ideas, but B) also tend to be slightly moreaggressive in terms of their timing.Atthe front end of that, sort of the most aggressive of all, are the prop desksof big banks. At themoment, I’m working in a boutique.Wedon’t have a prop desk.If I was backin one of the big houses I’d been previously, you’d have your own prop desk,which you’d talk to pretty actively in terms of trading.You’d also have other prop desks, as I donow actually, other prop desks through your clients.I’ll be talking to other prop desk at the client, and they veryrarely give too much of a stuff about fundamentals.They’re much more driven on short term catalysts, the way themarket ? it’s interesting because I know, from a technical point of view, youwould want to look at a chart and see in a candle or in a open high/low closebar all the information that’s in there. In the market when you’re talking to the people who are actually drivingthe market because of the volumes, they’re kind of looking at it the same way,but they’re also very cognizant of the information that’s creating a new high ?or intra-day high or whatever else.?
P: That’squite interesting because there has been a lot of talk in various places wherepeople are saying they don’t take any notice of these people who’ve got thelarge volume of any of these patterns at all. Obviously, it sounds to me like they get an overall picture of what’sgoing on and they make a decision based on that. I’vejust got a question for you.You saidyou started 10 years ago in the industry. People are prepared to have a sort of long term, or 1 year view, andit’s got shorter and shorter.Why doyou think that’s actually happened, why do you think it’s suddenly come down tomuch more short term?I know it’s beenpartially driven by hedge funds, but there must be other driving factors inthat.
J:I thinkthe markets have become more efficient and they react much more quickly todiscount events.I think because thebanks have gotten bigger, the prop desks. There is simply more money sloshing around effectively, and the moreliquid the market the more efficient it becomes with discounting information.
P: Very goodanswer.One of the questions I wantedto ask you linked into that.You saidyou started 10 years ago.How did youactually get started in the industry?
J:As ananalyst, there are two ways in, really. One is to come in onto a graduate scheme and have a look around at thebank and decide that’s what you want to do. There are a certain number who have kind of always been analysts.I think that’s very good, particularly inthe big houses.You get a very goodeducation and obviously, they’re picking people who are from the bestuniversities and the best people at the interview process.You know you’re getting a high caliberperson through that. Theother route is to go into industry and find people who know the sector quitewell.That’s effectively how I gotin.I’d had a career where I wastrained as an accountant, ended up doing corporate financing in a company.It was a technology company at the rally upinto 2000.As the whole bankingindustry is now extremely aware, it’s exceptionally cyclical so with booms theyjust can’t get enough people.In buststhey fire them all again.
P: I wasworking for a technology-based company around about the same time and Iremember the sort of boom that happened and they all disappeared veryquickly.I guess it’s just one of thosethings.So those are the two waysin.Are there any specificqualifications that are required to be an equities analyst?I know they pick top people ?
J:Notreally, like the rest of the city, obviously there is the FSA type of stuff, thatyou need from a regulatory perspective. I think the CFA, particularly in the U.S., the CFA is becoming ? I’m notsure it’s mandated.
P: What doesCFA stand for?
J:I don’teven know what it stands for.I haven’tgot it.[laughter]It might be Chartered Financial Analyst.
P: Okay, soit’s some qualification.
J:You take3 or 4 years.It’s pretty difficult,actually.I think it’s in 3 stages andcertainly from what I’ve heard, from people who’ve done it, by the time you’redoing the third stage, it is a real commitment.Quite a lot of accountants, similar to myself, were either ACA ormanagement accounting qualifications. Obviously, you have to be completely conversant, able to dive into anannual report.
P: Andunderstand it.I took an MBA myself,and there was a heavy emphasis on understanding company reports so I know whatyou’re talking about there.The reasonI was asking what it stood for is people listening to this may hear 3-letteracronyms and not actually know what they mean. It’s basically a qualification.
J:I don’tknow that one either.I think it’s theChartered Financial Analyst, or maybe Certified.
P: Can I askanother question?How do you go aboutgetting remunerated in the actual role that you’re in?Do you get paid a bonus, a salary, or isthere a combination?How does thatwork?
J:For me,in the places I’ve been, it’s been a combination of the two.Every house will have a different way ofdoing things.There will be differentweightings between bonus and basic comp. The bonus as well, whether that’s cash or stock, varies from house tohouse.If you look at the other rolesaround, for example sales, at the end of the day you probably take home asimilar sort of package in bonus as the sales person.But, a sales person is much more bonus heavy in thatpackage.They’ll have a relatively lowbasic and are very much incentivized through their bonuses, and it may be avery formal relationship in the sense that over a certain level they’ll get acertain percentage of the commissions they generate, or something in thatbasis. Analystcompensation is a bit more complicated. Again, post the Spitzer rulings, it’s not legitimate to pay an analystlinked to the corporate deals that they ? first of all, you’re not supposed touse them in corporate deals anyway. Analysts can’t go out on a pitch, for example, with the bankers to say?Do X, Y, and Z.?Equally, if thecompany you covered was involved in a big M&A deal or whatever else, theanalyst’s remuneration can’t be influence by that. You’d benaïve to think that a very influential analyst who is listened to by 1, 2, and3 in the sector and on the street, who is obviously bringing companies in evenif not explicitly themselves but companies are attracted because they know thisguy has a reputation and it’s something the bankers will talk about whenthey’re pitching the bank to a client. Clearly, an analyst is going to get a degree of compensation whichrelates to his total value to the bank. It just can’t be explicitly linked, and that’s fair.
P: That’sfair.I know the government is talkingabout restricting all these bonuses but in reality, it’s unworkable I think.
P: Iunderstand that and I think it’s going to go the same way in this country.Of course, the other risk is it could justdrive all the activity out of London.Ithink that’s just daft.That’s myview.I know I should be interviewingyou, not giving my views. Justanother question for you, James.Whatare the hours actually like?You said abit earlier you can be in at 7:00 in the morning.Is that normal?
J:The hourstend to be quite long.Again, they willdepend a little bit on where you are. If you’re at Goldman’s or Merrill’s or one of the bigger Americanhouses, they’re pretty brutal actually.
P: So atypical analyst ?
P: That’sstill 11 hours.That’s still quite a ?
J:It’s areasonably long day.
P: If youcount traffic time in that, it’s still going to be sort of a 12 ? 13 hour day.
J:Exactly,I have travel as well.That turns intoa long day.It seems like sort of aworking day.I mentioned result season.The way I look at it, it’s almost like aquarterly cycle.Each month within thatcycle is quite different in term of the activities that you do. If youthink of a quarter, roughly speaking, earnings will come in one of thosemonths.That’s very much a case of youhave to write your previews, you have to establish ? your part of driving aconsensus view for the stock in the sector that you’re covering, in terms ofthe earnings forecast for the period. When the results come out, you then look at those, analyze those, passcomments back to your clients and the sales people take part in the conferencecall, the management meetings and everything else. Themonth after that is typically quieter and you get an opportunity to write somesort of fundamental research.Theremight be a theme, for example, that’s come out of the reporting period,pressure on costs, or maybe revenues being stronger or weaker for a particularreason and you try to explore that in a piece of fundamental research, whichwill have implications for the stocks in your sector.That will take 3 or 4 weeks, or 2 or 3 weeks to write. Typically,the third month of that cycle, you go out on the road and market that to theclient base.One of the bigger banks,which has sort of European and good U.S. exposure, you might spend 10 days inthe U.S., a week in Europe, and a week in the U.S. ? 2 or 3 days in London andperhaps a day in Edinburough.
P: So thereis a reasonable amount of travel then, really.
J:Yes, inthat sort of month.They overlap alittle bit.It’s not always neatly amonth, but typically, 1 out of 3 you will be doing a lot of travelling to seeclients and run through your sector.
P: Youstarted talking about a typical day for you will start about 7:15 and then youhave a morning meeting.What sort ofthings would you do throughout the day?
P: It must bean interesting thing because if your forecast is accurate, then you’re going topat yourself on the back.If it’s milesout, either positively or negatively, does that have an impact on what you’regoing to do?
J:Yes,because if you’re miles out, let’s say something’s come in and beat yourforecast, again it depends on if you’re a seller or buyer in it, but dependingon why, you might change your rating if it was very different.If it was different and you’re the rightside of it, in terms of your recommendation, you might upgrade your numbers forthe rest of the year. Ofcourse, the market cares about where the consensus moves to.The question you’ll always get, particularlythe smaller house because in a boutique you’re not moving the market.If you’re Goldman’s or a Morgan Stanley,what you say will move the stock.Whenyou’re a small house it doesn’t do that. The question you’ll usually get in the morning meeting will be ?That’sfine.They beat your numbers by 2% orwhatever.Relative to consensus, wherewill their results be and will consensus need to move it some numbers up ordown??In the days following the results,you get a series of upgrades and consensus forecasts move up then obviously,that’s bullish
J:That’sthe interesting thing because in terms of the information flow, the market hasacted on that information by the time the market opens at 8:00.By the time the retail market gets a hold ofit, it’s old news.
P: I gatheredthat, so it’s a different situation for retail traders.Your typical day, at the moment, you’regoing to be working on reports.Itsounds like you’re basically crunching numbers, by the sound of things. J:It’squite geeky, some of it.
P: I canunderstand that.
J:I’m notquite keen on that part.
P: I’mpresuming you do take a break at lunch or do you just work straight through?
J:Most ofus work straight through, actually, unless you’re going off for a client lunchor something like that.The days of the3-hour boozie lunches with your mates are pretty much over, or they were.In my 10-year career, they’ve never beenaround that much, partly because when I started off it was with an Americanbank and was never part of the culture anyway. Lunches are sandwiches at your desk.
P: Then youpresumably work through until about 6:00 and then go home, I guess?
J:Prettymuch, the sales people generally go out and see ? it’s quite an interestingdividing between who are friends and who are clients.There is a time, friends become clients, and clients becomefriends.It’s a relatively smallcommunity.You go around at lunch timeand you bump into people you know.It’sthat kind of atmosphere.If you go outand have lunch with somebody who is a friend, but they’re also a client, that’sthe ideal situation really because it means you’re actually enjoying the lunch,but you can do business as well.
P: Can I askyou another question?Have you gotpeople who currently work for you?
J:I don’t,but that’s a function of the size of house we are.As I say, it’s a boutique and it’s pretty small and it’sgenerally 1 or 2 person teams.In myprevious existences, yes, because teams could be into double digits if it’s abig sector.You typically have a seniorpublishing analyst and then maybe 1 or 2 associates supporting them.The way that would generally work is thepublishing analyst is like the face of the stock, and sadly, the associates doall of the work.
P: It soundslike a lot of managerial positions I’ve seen elsewhere.Who are you responsible to?Who do you report to in your current role?
J:In myrole, to the Head of Equities.
P: So it’sfairly straightforward.Does he have alarge number of people who report to him, or is it ?
J:All thesenior analysts report to him, and the Head of Sales reports to him.
P: Okay, hasthe credit crunch affected your sector of the industry, at all?
J:Yes, lessbadly than some but obviously, it has had an impact.There are two issues. There is the fundamental impact on the industries that I cover and thereis also the impact on the financial services, given that the credit crunch isaffecting the people that I’m talking to and my clients are being maderedundant, or have been, not now ? things are a bit more positive.There have been two aspects to it but yes,it has impacted the companies I cover.
P: Has itstarted to pick up a bit again, at the moment, I think you just said?
J:Well inthe general industry yes, in banking yes, but in the industry I cover, notparticularly.Things are evening outbut you can see actually in the real economy, if you like, it’s stillincredibly difficult even though some of the financial commentators arestarting think otherwise.
P: We’restill seeing people being made redundant all over the country, and I know theysaid we’re out of recession now but in reality, I think the impact of it hasstill not filtered through.
P: Linked tothat is have you been affected by any of the various rescue packages and newlegislation regarding financial institutions that the government has broughtout?
J:I wouldhave been had I been at one of my bigger employers, definitely.I’m working for a boutique bank which is apartnership owned by the people working here. We’re under the radar and as far as I’m aware, we’re not really impactedby any of the things that are being discussed.
P: It soundsas if you’re better because obviously, it’s had a big impact on the largerbanks, hasn’t it?
J:I thinkwe suggested earlier, there are some very clever people who I think are alwaysgoing to be one step ahead of the regulations. [laughter]
P: I thinkthat’s true.It’s always been the caseas well.Whenever laws are brought outfor this sort of thing, people end up getting around them.It will continue.
J:I thinkwhat is definitely true, and you alluded to it earlier, the company that I workfor has various offices around Europe. I think the partnership and domicile is the Netherlands, or Luxembourgor somewhere else where it’s obviously quite efficient to be.I’m mobile. I’d be very happy to go elsewhere based on quality of life.I wouldn’t be quite keen to go and work inFrankfurt, but Geneva ? yeah, I’d be very happy to go work in Geneva, noproblem with that at all.
P: I know afew people who like Geneva quite a lot. I don’t think you’d be out of place there at all, would you?
J:I’m notsure whether the regulators and politicians really realize ? I think that’s oneof the big things that’s changed with technology over the last 10 ? 15years.People are enormously mobile,while being able to be completely effective in their jobs.They can base themselves anywhere.
J:It onlyattracts media attention when things are going wrong.[laughter]In two ways,in a big negative way, there was a big issue with research in the late ?90s andearly 2000, the famous sort of Henry Blodget type situation where they wereprivately calling stocks crap but then putting buys on them is totallyunjustified and there was a huge media backlash against that.I think it’s only fair that there shouldhave been, and a regulatory backlash to follow. In thesense that each market crashed with its own reason and for its own catalysts,our time in the sun as analysts was in that 2000 crash when it was all becauseof us.At that point, there was a lotof negativity.Frankly, it probably waswarranted.Movingon, the other side of it is analysts tend to get quoted in the press.Different banks have very different views tohow they like their analysts to be represented in the media.Some are very pro because they think itraises the bank’s profile.Some arevery anti because they think it commoditizes what the analysts are doing.You can piss clients off if you saysomething on CNBC, but actually, they pay quite a lot of money to be told on asort of client bespoke client basis.Differentbanks have different roles.We’re notparticularly media heavy here so I keep a fairly low profile.I’m happy with that.
P: That’s agood point.One of the questions linkedinto this is what advice would you give to somebody who wants to become anequities analyst?
J:Itdepends where you are.If you’reyoungish and setting out on a career, I actually think the banks ? I think thisis true pretty much across the disciplines with the exception maybe of sales.I think the bank is a pretty brutal place tospend your twenties.I can think ofbetter things to do than working 16-hour days as an associate in a division ofthe bank.From aquality of life perspective, I would say get experience in a corporate, get theright experience because you need to be corporate finance, strategy, one of thekind of close to the CFO or CEO type functions, and then look for anopportunity in one of the bull markets to move across, taking that expertisewith you.You’ll always be a valuableperson if you know the industry from the inside out.To me, that’s the more humane way of doing it than doing it as agraduate where you write off your twenties in a series of 16-hour days, 7 daysa week.
P: Somepeople get burnt out by that, as well.
J:Talkingto people who have been in banks ? again I was in this boutique and we weren’tparticularly affected because we were already very small.Talking to the banks where they did see bigwaves of redundancies, a lot of people have left the industry entirely, in thatyounger bracket because they couldn’t see the upside. You canargue if they go back, and you’ve got all these extremely talented people withvery good qualifications in physics, maths, chemistry, and whatever else, a lotof them are apparently going into teacher training.That’s not a bad thing.
P: It isn’tbut for the fact that they’re talking about making about 3,000 teachersredundant aren’t they, at the moment?
J:Right,then that’s not so good.The fact is,if you get some of these people going back into the real economy and the Cityof London doesn’t drain quite as much resource from the universities as it hasover the last decade or so, that’s not necessarily a bad thing.
P: I see yourpoint on that.I think I agree.
J:If youwant to do it from the graduate route, then really, you need an extremely gooddegree from an extremely good university to get through the standard investmentrecruitment process, which is a pretty tough process.
P: You saidthat, which I suppose people are sort of open to apply for it.I guess the attrition rate is quite high forpeople applying for these positions.
J:It is andyou’ve got to remember that although, if you’re British and you’re applying forwork in a London bank, actually in practice, the London branches are theEuropean offices for most of these banks ? the main office, so not only are youapplying against graduates from Oxbridge, the LSE, whatever else, but also fromthe best places in France, Germany, Switzerland, Spain, and Italy who are alsoall applying to come and work in London because it’s the European capital offinance and it’s where the European bank offices are all headquartered. Thecompetition at the graduate stage is hugely intense.Frankly, it’s probably another reason why you’re better off, Iwould say, if you definitely know you want to be an analyst, doing it throughthe industry that you have an interest in and coming in later from thatspace.The problem is, in reality whenpeople are at that stage of applying, they don’t necessarily know what theywant to do other than they want to work in a bank or in financial services.
P: I thinkit’s the glamour image that people have about being involved in this kind ofindustry, isn’t it, a lot of time. ?Yes, I definitely want to do that,? but like you say ?
P: I supposeit depends what you want from your career, really.There are people who would like the publicity.There are other people who are probablyquite happy not to be in the public eye. It really depends on what you desire, but it sounds like regardless ofwhat you desire, there is a very high level of competition for any of thesepositions anyway.
J:That’strue of investment banking, generally.
P: Okay,James, I don’t know if there is anything you wanted to add to theconversation.Have you covered prettymuch everything?
J:I thinkwe’ve covered most of the stuff. Hopefully, it will be of interest to people who are looking at thewebsite.
P: I’m sureit will.
J:I don’tthink there’s anything we haven’t really touched on.
P: I thinkwe’ve pretty much covered everything and I think it will be an interestingarticle for people to listen to.I hopethey enjoy it.That’s great.Thanks James.
P: Thisrecording is copyright ©, Trade2Win Ltd., 2009, all rights reserved.
You can listen or download this interview by clicking this link:Equity Analyst Interview