P: = Paul Mullen (Interviewer)
J: = James (Equities Analyst)
You can listen or download this interview by clicking this link:
Equity Analyst Interview
P: Hello, and welcome to everyone. My name is Paul Mullen. I'm also known as Trader333 and I'm the Content Development Editor for Trade2Win.
Today, I'm interviewing James, who is an equities analyst working in London, so a very warm welcome to you James. We'll start straightaway by asking you what is an equities analyst, assuming that is what you are?
J: Yes, that is what I am. It's quite a complicated role because I think the way it's perceived is people see the end product being written reports, generally, with recommendations and price targets, and so on. That's actually a very small part of what the analyst does. It might be helpful, in a way, to look at the other way around and say who pays for the work that an analyst produces, and therefore what are they actually directed towards?
There are really two answers to that. The real payment for analyst research is from the big institutional investors. They pay, really, in two ways; either by a regular check which is paid for, I suppose, the simplest way of doing it because it completely disintermediates the kind of independence of the research and any kind of sales and trading aspect to it as well. There might be potential conflict of interest.
Or, they can do it through directed commissions, which is essentially you come up with a very good idea and talk to some manager about that, they will ask their desk trader, their house trader, to place the trade through your institution.
The other side of it, which is still important, and is slightly complicated by all the stuff after the dot com bust and the Spitzer Rules that came in, is essentially the corporate side of it. This is more important on the smaller stocks because again, if you're covering a boutique house, which will typically cover mid and small account names, there simply aren't the trading commissions in those. There isn't the trading volume in those -
P: Right because they're usually low volume stocks.
J: ... to cover the costs. Kind of explicitly, one accepts the research is being written from the perspective of a corporate angle, which in theory shouldn't actually change the recommendation. I'll move through buys and sells and hopefully, by being tactful with the company, I can maintain a good relationship with the company through a period when I'm a sell on it.
P: This is the customer you're talking about here, who actually pays you for this work?
J: It would essentially be hoping the company thought, "Okay such and such a bank knows what they're doing. They have a very insightful brokering business, a very insightful analyst," therefore if they're looking for a corporate brokering partner, "this is someone we would want to do business with."
P: Can I ask you a question? You said you have large institutions. Can you give me an example of an institution that may use your services?
J: There are three really, if you divide them up. You have the classic, long only pension fund or unit trust mutual provider, somebody like a Fidelity, Threadneedle those kinds of people, who depending on their scale will either talk to you directly at the fund manager level so you'll be talking to the people running the funds; or the bigger houses, the places like Fidelity will actually have their own analysts. Most of the conversations you have will be with what's called the buy side analyst who sits in that place and essentially distills all the broker research coming in, and all the broker opinions, for the benefit of the fund manager.
P: I want to clarify something. You're saying these large institutions have their own analysts, are they're then subcontracting some of that work to you, or are you just working with them to actually give advice on what the best thing is to invest in?
J: It varies from place to place. Different houses, different investors have their own model for doing this. The buy side analyst itself is a role that kind of goes in and out of favor. If you can imagine; from my point of view I would say it's a fairly inefficient way of doing things. You're really duplicating what the sell side is doing.
If you were absolutely huge, like a Fidelity, you can cover the cost of that. What they're doing is they're kind of distilling information, rather than coming up with completely original ideas of their own. They're kind of distilling what's going on in the street and then giving that to the fund manager, rather than letting the fund manager have to deal with the big stocks, like a Vodafone or a BT or Shell. You might have 40 or 50 analysts covering it.
P: That's quite a lot, isn't it? The reason I say this is because I remember a model that the government were using to try and predict economic forecasts, and at one point, they had something like a ludicrous number of people involved in it, and something like 1,300 variables, and they still got it wrong. In the end, they actually reduced it down to a very small number and it was as accurate as it was when it was a high number.
Do you think that 40 analysts looking at - are you talking about 1 stock here or are you talking about across a number of stocks? That's a large number.
J: An analyst will typically cover between 10 and 20 stocks. If you take a typical sector, it might have between 20 - 40 stocks in it. An analyst team will be 3 or 4 analysts within the team and they'll divide the stocks up amongst them. It's true; the thing is, there are a lot of funds out there. This is where it comes down to coming back to what we do and this impression that a lot of people have is it's about written reports. It's not. Written reports are one of the things that we do, but actually a lot of it is much more reactive because clearly, reports have a huge lead time and you tend to write them when you've got something very big to say in the sector, or when you're initiating a particular company. Most of what you do is over the phone and in one-to-one contact. Obviously, an analyst can only have so many relationships with people in the investment community.
Effectively, you will end up having a very good relationship with a fund manager or with a buy side analyst, who kind of trusts your opinion and thinks you know what you're talking about - on the fund manager side, less so if it's a buy side analyst; it will be different because they'll want to talk to as many people as possible because that's their job, to kind of distill that down. A fund manager will probably have 3 or 4 people that he likes to talk to on a particular stock he has on his portfolio.
The other way it happens, is say a fund manager is thinking - he'll probably have some screening mechanism that will tell him a certain stock is of interest. It may not be one he's that familiar with or looked at in detail before. He'll go to someone like Bloomberg, which will have a ranking of analysts. He'll look down and see which analyst is best there, either by quality of the recommendation or how good their earnings forecast is, or whatever it is.
P: Performance has got to be one of the issues. This sounds like quite an insular kind of industry; that you're going to be in contact with pretty much the same sort of people for the same kind of stocks or sectors, on an ongoing basis. Would that be right?
J: Yes, and very often the analyst will have a background in the industry that they're specialists in. Yes, you'll have a series of teams. Except for the junior level, where obviously people move around for experience, if they come in, say on bank's graduate scheme, they might join one team and then move around as other opportunities come up. Obviously, that would be good to give a rounded view, but generally as you get more senior, you either specialize or you come in at a more senior level because you've actually got industry experience in a particular sector.
P: James, can I ask you a question? One of the things you're talking about there was you said you're writing reports, talking a lot to people on the telephone about various investment potential. I'm presuming, and correct me if I'm wrong, but this is pretty much all based on fundamental analysis; it's not going to be based on chart patterns or anything like that.
J: The way it should work doesn't always, and also, analysts are very different. I've got more of an interest from the trading side, so although I'll never make a recommendation on the back of a particular chart pattern or whatever else, it has to be fundamental. I may look at something and think it's looking pretty extended, or there is a certain pattern on the chart that makes me think this is a good time to reiterate that view that I've already got.
The way it should work is an analyst comes up with the fundamentals and then the sales people, if you think as a house we've got however many analysts who are coming up with ideas; we have a morning meeting every morning at 7:00. You'll have 6 or 7 analysts speaking on either news that's happened in their sector and the impact that's got on their stocks, or new ideas, or reiterating existing ideas.
The sales people go away, and then they all distill all that down into perhaps 2 or 3 ideas that they want to talk to clients about that day. They will often be much more chart focused or technically focused than the analysts. They'll combine the two. Typically, a sales person worries about the timing on a particular call. I might have a view this particular stock is hugely undervalued by the market, but as we all know; stocks can remain hugely undervalued for a very long time.
P: If no one's buying them, that's going to happen, isn't it?
J: Yes, or there is a particular catalyst. You're waiting for the market to sit up and pay attention, and that's going to take a while to come through. It doesn't start with the charts being cheap and therefore you having a buy on it but maybe the sales 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 right fundamentally, but I'm not going to push that to my clients yet because I think there is a bit of a delay or the chart doesn't look good, or the stock looks over sold, -
P: So you're combining a long-term thing. It sounds to me like if you do any real technical analysis on this, it's more short term. Would that be a correct assumption?
J: Well, in a way it would be short term now. When I started in this industry a decade or so ago, fund managers, if you went to the Fidelity end, the Threadneedle end, really for the long term, pension fund type managers, they would be happy to take a view on a stock on a 1-year view. One of the things that has been very interesting, over the last 10 years that has been very noticeable, is that actually everybody is much more short term in their focus. I think part of that is probably driven by the hedge funds, which is then the second category of clients I was going to talk about.
If you don't have the hedge fund managers, who obviously A) are looking to sell short ideas as much as they are long ideas, but B) also tend to be slightly more aggressive in terms of their timing. At the front end of that, sort of the most aggressive of all, are the prop desks of big banks.
At the moment, I'm working in a boutique. We don't have a prop desk. If I was back in 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 do now actually, other prop desks through your clients. I'll be talking to other prop desk at the client, and they very rarely give too much of a stuff about fundamentals. They're much more driven on short term catalysts, the way the market - it's interesting because I know, from a technical point of view, you would want to look at a chart and see in a candle or in a open high/low close bar all the information that's in there. In the market when you're talking to the people who are actually driving the 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's quite interesting because there has been a lot of talk in various places where people are saying they don't take any notice of these people who've got the large volume of any of these patterns at all. Obviously, it sounds to me like they get an overall picture of what's going on and they make a decision based on that.
I've just got a question for you. You said you started 10 years ago in the industry. People are prepared to have a sort of long term, or 1 year view, and it's got shorter and shorter. Why do you think that's actually happened, why do you think it's suddenly come down to much more short term? I know it's been partially driven by hedge funds, but there must be other driving factors in that.
J: I think the markets have become more efficient and they react much more quickly to discount events. I think because the banks have gotten bigger, the prop desks. There is simply more money sloshing around effectively, and the more liquid the market the more efficient it becomes with discounting information.
P: Very good answer. One of the questions I wanted to ask you linked into that. You said you started 10 years ago. How did you actually get started in the industry?
J: As an analyst, there are two ways in, really. One is to come in onto a graduate scheme and have a look around at the bank 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 in the big houses. You get a very good education and obviously, they're picking people who are from the best universities and the best people at the interview process. You know you're getting a high caliber person through that.
The other route is to go into industry and find people who know the sector quite well. That's effectively how I got in. I'd had a career where I was trained as an accountant, ended up doing corporate financing in a company. It was a technology company at the rally up into 2000. As the whole banking industry is now extremely aware, it's exceptionally cyclical so with booms they just can't get enough people. In busts they fire them all again.
P: I was working for a technology-based company around about the same time and I remember the sort of boom that happened and they all disappeared very quickly. I guess it's just one of those things. So those are the two ways in. Are there any specific qualifications that are required to be an equities analyst? I know they pick top people -
J: Not really, like the rest of the city, obviously there is the FSA type of stuff, that you need from a regulatory perspective. I think the CFA, particularly in the U.S., the CFA is becoming - I'm not sure it's mandated.
P: What does CFA stand for?
J: I don't even know what it stands for. I haven't got it. [laughter] It might be Chartered Financial Analyst.
P: Okay, so it's some qualification.
J: You take 3 or 4 years. It's pretty difficult, actually. I think it's in 3 stages and certainly from what I've heard, from people who've done it, by the time you're doing the third stage, it is a real commitment. Quite a lot of accountants, similar to myself, were either ACA or management accounting qualifications. Obviously, you have to be completely conversant, able to dive into an annual report.
P: And understand it. I took an MBA myself, and there was a heavy emphasis on understanding company reports so I know what you're talking about there. The reason I was asking what it stood for is people listening to this may hear 3-letter acronyms and not actually know what they mean. It's basically a qualification.
J: I don't know that one either. I think it's the Chartered Financial Analyst, or maybe Certified.
P: Can I ask another question? How do you go about getting remunerated in the actual role that you're in? Do you get paid a bonus, a salary, or is there a combination? How does that work?
J: For me, in the places I've been, it's been a combination of the two. Every house will have a different way of doing things. There will be different weightings between bonus and basic comp. The bonus as well, whether that's cash or stock, varies from house to house. If you look at the other roles around, for example sales, at the end of the day you probably take home a similar sort of package in bonus as the sales person. But, a sales person is much more bonus heavy in that package. They'll have a relatively low basic and are very much incentivized through their bonuses, and it may be a very formal relationship in the sense that over a certain level they'll get a certain percentage of the commissions they generate, or something in that basis.
Analyst compensation is a bit more complicated. Again, post the Spitzer rulings, it's not legitimate to pay an analyst linked to the corporate deals that they - first of all, you're not supposed to use 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 the company you covered was involved in a big M&A deal or whatever else, the analyst's remuneration can't be influence by that.
You'd be naïve to think that a very influential analyst who is listened to by 1, 2, and 3 in the sector and on the street, who is obviously bringing companies in even if not explicitly themselves but companies are attracted because they know this guy has a reputation and it's something the bankers will talk about when they're pitching the bank to a client. Clearly, an analyst is going to get a degree of compensation which relates to his total value to the bank. It just can't be explicitly linked, and that's fair.
P: That's fair. I know the government is talking about restricting all these bonuses but in reality, it's unworkable I think.
J: It's totally unworkable. Already, you're seeing in the U.S. banks, which I think might be slightly further ahead of this; a couple of U.S. - the way they seem to be going about it is restricting amount of variable pay as a portion of the total. They've doubled basic salaries. That's in no one's interest because it ends up adding to your fixed costs. The whole point of the bonus is it allows you to really ratchet down on the costs when times are hard because you just don't pay bonuses.
P: I understand that and I think it's going to go the same way in this country. Of course, the other risk is it could just drive all the activity out of London. I think that's just daft. That's my view. I know I should be interviewing you, not giving my views.
Just another question for you, James. What are the hours actually like? You said a bit earlier you can be in at 7:00 in the morning. Is that normal?
J: The hours tend to be quite long. Again, they will depend a little bit on where you are. If you're at Goldman's or Merrill's or one of the bigger American houses, they're pretty brutal actually.
P: So a typical analyst -
J: You kind of marry the firm. You will work weekends. You're in at 7:00 for a morning meeting at 7:15 or 7:30. You're probably still at your desk a good 12, 13, 14 hours later. I've been there and done that and I think one of the interesting trends you're seeing at the moment, partly driven by some of the issues that have unfolded in the banking sector over the last couple of years; more and more experienced people are moving to small houses, such as I'm in at the moment, boutique type houses where you're possibly a partner in the firm.
It's much more of an environment where you feel you own and control the business that you're in. Because of that, one of the quid pro quos is when you've been doing it for a while, you get a bit older and you've got family and things to think about as well, the hours moderate a bit as well. My typical day, I'm usually in by about 6:45, which gives me a chance just to check there're been no overnight - my sector actually a fair bit of news comes out of the U.S., and to a degree Asia, so I need to make sure there's nothing there that affect companies that I cover. If there are, we have a morning meeting that starts at 7:15 so I need to be ready to have something written and present to the sales desk. To be honest for me, unless it's result season, I'm typically done by about 6:00.
P: That's still 11 hours. That's still quite a -
J: It's a reasonably long day.
P: If you count 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 into a long day. It seems like sort of a working day. I mentioned result season. The way I look at it, it's almost like a quarterly cycle. Each month within that cycle is quite different in term of the activities that you do.
If you think of a quarter, roughly speaking, earnings will come in one of those months. That's very much a case of you have to write your previews, you have to establish - your part of driving a consensus view for the stock in the sector that you're covering, in terms of the earnings forecast for the period. When the results come out, you then look at those, analyze those, pass comments back to your clients and the sales people take part in the conference call, the management meetings and everything else.
The month after that is typically quieter and you get an opportunity to write some sort of fundamental research. There might 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 particular reason and you try to explore that in a piece of fundamental research, which will 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 the client base. One of the bigger banks, which has sort of European and good U.S. exposure, you might spend 10 days in the U.S., a week in Europe, and a week in the U.S. - 2 or 3 days in London and perhaps a day in Edinburough.
P: So there is a reasonable amount of travel then, really.
J: Yes, in that sort of month. They overlap a little bit. It's not always neatly a month, but typically, 1 out of 3 you will be doing a lot of travelling to see clients and run through your sector.
P: You started talking about a typical day for you will start about 7:15 and then you have a morning meeting. What sort of things would you do throughout the day?
J: It varies, going back to what I was saying; it varies on which of those months you are in that quarterly cycle. At the moment, we're coming up to earnings season. I'm going through all my models. It's reasonably complex, the Excel models for each company, they cover forecasting what I think the quarterly results are going to be. That's a fairly insular job. Today, I'll pretty much have my head down and be going through those things.
If it's a results day, then the hours can go all over the place because a European company typically reports at 6:00 a.m. U.K. time so I'd be in at about 5:45, to have about an hour to look through those results and analyze those results, and write something ahead of the morning meeting at 7:15. Then it would be very unusual for a company to be bang in line with your forecast and not have to change your forecast.
P: It must be an interesting thing because if your forecast is accurate, then you're going to pat yourself on the back. If it's miles out, either positively or negatively, does that have an impact on what you're going to do?
J: Yes, because if you're miles out, let's say something's come in and beat your forecast, again it depends on if you're a seller or buyer in it, but depending on why, you might change your rating if it was very different. If it was different and you're the right side of it, in terms of your recommendation, you might upgrade your numbers for the rest of the year.
Of course, the market cares about where the consensus moves to. The question you'll always get, particularly the 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. When you're a small house it doesn't do that. The question you'll usually get in the morning meeting will be "That's fine. They beat your numbers by 2% or whatever. Relative to consensus, where will their results be and will consensus need to move it some numbers up or down"? In the days following the results, you get a series of upgrades and consensus forecasts move up then obviously, that's bullish
P; I see that. You do see those kinds of reports coming out on things like briefing.com for example. It will turn around and say, "Stock upgraded by such-and-such by Goldman," or something like this. You're obviously seeing it a bit later, but I know some people who like to trade things as they come out.
J: That's the interesting thing because in terms of the information flow, the market has acted on that information by the time the market opens at 8:00. By the time the retail market gets a hold of it, it's old news.
P: I gathered that, so it's a different situation for retail traders. Your typical day, at the moment, you're going to be working on reports. It sounds like you're basically crunching numbers, by the sound of things.
J: It's quite geeky, some of it.
P: I can understand that.
J: I'm not quite keen on that part.
P: I'm presuming you do take a break at lunch or do you just work straight through?
J: Most of us work straight through, actually, unless you're going off for a client lunch or something like that. The days of the 3-hour boozie lunches with your mates are pretty much over, or they were. In my 10-year career, they've never been around that much, partly because when I started off it was with an American bank and was never part of the culture anyway. Lunches are sandwiches at your desk.
P: Then you presumably work through until about 6:00 and then go home, I guess?
J: Pretty much, the sales people generally go out and see - it's quite an interesting dividing between who are friends and who are clients. There is a time, friends become clients, and clients become friends. It's a relatively small community. You go around at lunch time and you bump into people you know. It's that kind of atmosphere. If you go out and have lunch with somebody who is a friend, but they're also a client, that's the ideal situation really because it means you're actually enjoying the lunch, but you can do business as well.
P: Can I ask you another question? Have you got people 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's generally 1 or 2 person teams. In my previous existences, yes, because teams could be into double digits if it's a big sector. You typically have a senior publishing analyst and then maybe 1 or 2 associates supporting them. The way that would generally work is the publishing analyst is like the face of the stock, and sadly, the associates do all of the work.
P: It sounds like 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 my role, to the Head of Equities.
P: So it's fairly straightforward. Does he have a large number of people who report to him, or is it -
J: All the senior analysts report to him, and the Head of Sales reports to him.
P: Okay, has the credit crunch affected your sector of the industry, at all?
J: Yes, less badly 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 there is also the impact on the financial services, given that the credit crunch is affecting the people that I'm talking to and my clients are being made redundant, 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 it started to pick up a bit again, at the moment, I think you just said?
J: Well in the general industry yes, in banking yes, but in the industry I cover, not particularly. Things are evening out but you can see actually in the real economy, if you like, it's still incredibly difficult even though some of the financial commentators are starting think otherwise.
P: We're still seeing people being made redundant all over the country, and I know they said we're out of recession now but in reality, I think the impact of it has still not filtered through.
J: In theory, redundancy is a lagging indicator. In theory, before the economy starts to pick up, you will still be in a cycle of unemployment or net unemployment. Effectively, when employment starts to pull up - that's why the bull markets always climb a world of worry, and that's one of the things; you can have quite strong market recoveries on the face of expected recovery when the actual economic data in terms of jobless totals and whatever else still looks pretty bleak. That's absolutely classically where we are now. Talk to any of my companies and they're having a really tough time, but the financial services industry has picked up a little bit. The market has rallied enormously and people are generally a bit more optimistic than they were 6 months ago.
P: Linked to that is have you been affected by any of the various rescue packages and new legislation regarding financial institutions that the government has brought out?
J: I would have been had I been at one of my bigger employers, definitely. I'm working for a boutique bank which is a partnership owned by the people working here. We're under the radar and as far as I'm aware, we're not really impacted by any of the things that are being discussed.
P: It sounds as if you're better because obviously, it's had a big impact on the larger banks, hasn't it?
J: I think we suggested earlier, there are some very clever people who I think are always going to be one step ahead of the regulations. [laughter]
P: I think that's true. It's always been the case as well. Whenever laws are brought out for this sort of thing, people end up getting around them. It will continue.
J: I think what is definitely true, and you alluded to it earlier, the company that I work for has various offices around Europe. I think the partnership and domicile is the Netherlands, or Luxembourg or 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 in Frankfurt, but Geneva - yeah, I'd be very happy to go work in Geneva, no problem with that at all.
P: I know a few 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 not sure whether the regulators and politicians really realize - I think that's one of the big things that's changed with technology over the last 10 - 15 years. People are enormously mobile, while being able to be completely effective in their jobs. They can base themselves anywhere.
P: I completely agree with you. You see it in pretty much every industry, as well, outside the car industry, but you see it in the merchant-based industry. You can work anywhere in the world now, almost; it's changed dramatically. One other question I wanted to ask, James, is does your role attract much media attention? If so, is it warranted?
J: It only attracts 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 and early 2000, the famous sort of Henry Blodget type situation where they were privately calling stocks crap but then putting buys on them is totally unjustified and there was a huge media backlash against that. I think it's only fair that there should have been, and a regulatory backlash to follow.
In the sense 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 because of us. At that point, there was a lot of negativity. Frankly, it probably was warranted.
Moving on, the other side of it is analysts tend to get quoted in the press. Different banks have very different views to how they like their analysts to be represented in the media. Some are very pro because they think it raises the bank's profile. Some are very anti because they think it commoditizes what the analysts are doing. You can piss clients off if you say something on CNBC, but actually, they pay quite a lot of money to be told on a sort of client bespoke client basis. Different banks have different roles. We're not particularly media heavy here so I keep a fairly low profile. I'm happy with that.
P: That's a good point. One of the questions linked into this is what advice would you give to somebody who wants to become an equities analyst?
J: It depends where you are. If you're youngish and setting out on a career, I actually think the banks - I think this is true pretty much across the disciplines with the exception maybe of sales. I think the bank is a pretty brutal place to spend your twenties. I can think of better things to do than working 16-hour days as an associate in a division of the bank.
From a quality of life perspective, I would say get experience in a corporate, get the right experience because you need to be corporate finance, strategy, one of the kind of close to the CFO or CEO type functions, and then look for an opportunity in one of the bull markets to move across, taking that expertise with you. You'll always be a valuable person if you know the industry from the inside out. To me, that's the more humane way of doing it than doing it as a graduate where you write off your twenties in a series of 16-hour days, 7 days a week.
P: Some people get burnt out by that, as well.
J: Talking to people who have been in banks - again I was in this boutique and we weren't particularly affected because we were already very small. Talking to the banks where they did see big waves of redundancies, a lot of people have left the industry entirely, in that younger bracket because they couldn't see the upside.
You can argue if they go back, and you've got all these extremely talented people with very good qualifications in physics, maths, chemistry, and whatever else, a lot of them are apparently going into teacher training. That's not a bad thing.
P: It isn't but for the fact that they're talking about making about 3,000 teachers redundant 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 City of London doesn't drain quite as much resource from the universities as it has over the last decade or so, that's not necessarily a bad thing.
P: I see your point on that. I think I agree.
J: If you want to do it from the graduate route, then really, you need an extremely good degree from an extremely good university to get through the standard investment recruitment process, which is a pretty tough process.
P: You said that, which I suppose people are sort of open to apply for it. I guess the attrition rate is quite high for people applying for these positions.
J: It is and you've got to remember that although, if you're British and you're applying for work in a London bank, actually in practice, the London branches are the European offices for most of these banks - the main office, so not only are you applying against graduates from Oxbridge, the LSE, whatever else, but also from the best places in France, Germany, Switzerland, Spain, and Italy who are also all applying to come and work in London because it's the European capital of finance and it's where the European bank offices are all headquartered.
The competition at the graduate stage is hugely intense. Frankly, it's probably another reason why you're better off, I would say, if you definitely know you want to be an analyst, doing it through the industry that you have an interest in and coming in later from that space. The problem is, in reality when people are at that stage of applying, they don't necessarily know what they want to do other than they want to work in a bank or in financial services.
P: I think it's the glamour image that people have about being involved in this kind of industry, isn't it, a lot of time. "Yes, I definitely want to do that," but like you say -
J: It's classic quid pro quo; you do get paid well, there's no doubt about that. You do give your pound of flesh in return and it could be a tough life, particularly in the early twenties. I think particularly because you don't have the glamour side of it. You'll obviously get paid reasonably well, but you won't be a publishing analyst, you won't see your name on reports. You'll be doing all the donkey work, the spreadsheets, and everything else but without seeing the glamour part of it, which is important to some people and keeps them going.
P: I suppose it depends what you want from your career, really. There are people who would like the publicity. There are other people who are probably quite happy not to be in the public eye. It really depends on what you desire, but it sounds like regardless of what you desire, there is a very high level of competition for any of these positions anyway.
J: That's true of investment banking, generally.
P: Okay, James, I don't know if there is anything you wanted to add to the conversation. Have you covered pretty much everything?
J: I think we've covered most of the stuff. Hopefully, it will be of interest to people who are looking at the website.
P: I'm sure it will.
J: I don't think there's anything we haven't really touched on.
P: I think we've pretty much covered everything and I think it will be an interesting article for people to listen to. I hope they enjoy it. That's great. Thanks James.
J: Alright Bye
P: Bye
P: This recording is copyright ©, Trade2Win Ltd., 2009, all rights reserved.
You can listen or download this interview by clicking this link:
Equity Analyst Interview
J: = James (Equities Analyst)
You can listen or download this interview by clicking this link:
Equity Analyst Interview
P: Hello, and welcome to everyone. My name is Paul Mullen. I'm also known as Trader333 and I'm the Content Development Editor for Trade2Win.
Today, I'm interviewing James, who is an equities analyst working in London, so a very warm welcome to you James. We'll start straightaway by asking you what is an equities analyst, assuming that is what you are?
J: Yes, that is what I am. It's quite a complicated role because I think the way it's perceived is people see the end product being written reports, generally, with recommendations and price targets, and so on. That's actually a very small part of what the analyst does. It might be helpful, in a way, to look at the other way around and say who pays for the work that an analyst produces, and therefore what are they actually directed towards?
There are really two answers to that. The real payment for analyst research is from the big institutional investors. They pay, really, in two ways; either by a regular check which is paid for, I suppose, the simplest way of doing it because it completely disintermediates the kind of independence of the research and any kind of sales and trading aspect to it as well. There might be potential conflict of interest.
Or, they can do it through directed commissions, which is essentially you come up with a very good idea and talk to some manager about that, they will ask their desk trader, their house trader, to place the trade through your institution.
The other side of it, which is still important, and is slightly complicated by all the stuff after the dot com bust and the Spitzer Rules that came in, is essentially the corporate side of it. This is more important on the smaller stocks because again, if you're covering a boutique house, which will typically cover mid and small account names, there simply aren't the trading commissions in those. There isn't the trading volume in those -
P: Right because they're usually low volume stocks.
J: ... to cover the costs. Kind of explicitly, one accepts the research is being written from the perspective of a corporate angle, which in theory shouldn't actually change the recommendation. I'll move through buys and sells and hopefully, by being tactful with the company, I can maintain a good relationship with the company through a period when I'm a sell on it.
P: This is the customer you're talking about here, who actually pays you for this work?
J: It would essentially be hoping the company thought, "Okay such and such a bank knows what they're doing. They have a very insightful brokering business, a very insightful analyst," therefore if they're looking for a corporate brokering partner, "this is someone we would want to do business with."
P: Can I ask you a question? You said you have large institutions. Can you give me an example of an institution that may use your services?
J: There are three really, if you divide them up. You have the classic, long only pension fund or unit trust mutual provider, somebody like a Fidelity, Threadneedle those kinds of people, who depending on their scale will either talk to you directly at the fund manager level so you'll be talking to the people running the funds; or the bigger houses, the places like Fidelity will actually have their own analysts. Most of the conversations you have will be with what's called the buy side analyst who sits in that place and essentially distills all the broker research coming in, and all the broker opinions, for the benefit of the fund manager.
P: I want to clarify something. You're saying these large institutions have their own analysts, are they're then subcontracting some of that work to you, or are you just working with them to actually give advice on what the best thing is to invest in?
J: It varies from place to place. Different houses, different investors have their own model for doing this. The buy side analyst itself is a role that kind of goes in and out of favor. If you can imagine; from my point of view I would say it's a fairly inefficient way of doing things. You're really duplicating what the sell side is doing.
If you were absolutely huge, like a Fidelity, you can cover the cost of that. What they're doing is they're kind of distilling information, rather than coming up with completely original ideas of their own. They're kind of distilling what's going on in the street and then giving that to the fund manager, rather than letting the fund manager have to deal with the big stocks, like a Vodafone or a BT or Shell. You might have 40 or 50 analysts covering it.
P: That's quite a lot, isn't it? The reason I say this is because I remember a model that the government were using to try and predict economic forecasts, and at one point, they had something like a ludicrous number of people involved in it, and something like 1,300 variables, and they still got it wrong. In the end, they actually reduced it down to a very small number and it was as accurate as it was when it was a high number.
Do you think that 40 analysts looking at - are you talking about 1 stock here or are you talking about across a number of stocks? That's a large number.
J: An analyst will typically cover between 10 and 20 stocks. If you take a typical sector, it might have between 20 - 40 stocks in it. An analyst team will be 3 or 4 analysts within the team and they'll divide the stocks up amongst them. It's true; the thing is, there are a lot of funds out there. This is where it comes down to coming back to what we do and this impression that a lot of people have is it's about written reports. It's not. Written reports are one of the things that we do, but actually a lot of it is much more reactive because clearly, reports have a huge lead time and you tend to write them when you've got something very big to say in the sector, or when you're initiating a particular company. Most of what you do is over the phone and in one-to-one contact. Obviously, an analyst can only have so many relationships with people in the investment community.
Effectively, you will end up having a very good relationship with a fund manager or with a buy side analyst, who kind of trusts your opinion and thinks you know what you're talking about - on the fund manager side, less so if it's a buy side analyst; it will be different because they'll want to talk to as many people as possible because that's their job, to kind of distill that down. A fund manager will probably have 3 or 4 people that he likes to talk to on a particular stock he has on his portfolio.
The other way it happens, is say a fund manager is thinking - he'll probably have some screening mechanism that will tell him a certain stock is of interest. It may not be one he's that familiar with or looked at in detail before. He'll go to someone like Bloomberg, which will have a ranking of analysts. He'll look down and see which analyst is best there, either by quality of the recommendation or how good their earnings forecast is, or whatever it is.
P: Performance has got to be one of the issues. This sounds like quite an insular kind of industry; that you're going to be in contact with pretty much the same sort of people for the same kind of stocks or sectors, on an ongoing basis. Would that be right?
J: Yes, and very often the analyst will have a background in the industry that they're specialists in. Yes, you'll have a series of teams. Except for the junior level, where obviously people move around for experience, if they come in, say on bank's graduate scheme, they might join one team and then move around as other opportunities come up. Obviously, that would be good to give a rounded view, but generally as you get more senior, you either specialize or you come in at a more senior level because you've actually got industry experience in a particular sector.
P: James, can I ask you a question? One of the things you're talking about there was you said you're writing reports, talking a lot to people on the telephone about various investment potential. I'm presuming, and correct me if I'm wrong, but this is pretty much all based on fundamental analysis; it's not going to be based on chart patterns or anything like that.
J: The way it should work doesn't always, and also, analysts are very different. I've got more of an interest from the trading side, so although I'll never make a recommendation on the back of a particular chart pattern or whatever else, it has to be fundamental. I may look at something and think it's looking pretty extended, or there is a certain pattern on the chart that makes me think this is a good time to reiterate that view that I've already got.
The way it should work is an analyst comes up with the fundamentals and then the sales people, if you think as a house we've got however many analysts who are coming up with ideas; we have a morning meeting every morning at 7:00. You'll have 6 or 7 analysts speaking on either news that's happened in their sector and the impact that's got on their stocks, or new ideas, or reiterating existing ideas.
The sales people go away, and then they all distill all that down into perhaps 2 or 3 ideas that they want to talk to clients about that day. They will often be much more chart focused or technically focused than the analysts. They'll combine the two. Typically, a sales person worries about the timing on a particular call. I might have a view this particular stock is hugely undervalued by the market, but as we all know; stocks can remain hugely undervalued for a very long time.
P: If no one's buying them, that's going to happen, isn't it?
J: Yes, or there is a particular catalyst. You're waiting for the market to sit up and pay attention, and that's going to take a while to come through. It doesn't start with the charts being cheap and therefore you having a buy on it but maybe the sales 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 right fundamentally, but I'm not going to push that to my clients yet because I think there is a bit of a delay or the chart doesn't look good, or the stock looks over sold, -
P: So you're combining a long-term thing. It sounds to me like if you do any real technical analysis on this, it's more short term. Would that be a correct assumption?
J: Well, in a way it would be short term now. When I started in this industry a decade or so ago, fund managers, if you went to the Fidelity end, the Threadneedle end, really for the long term, pension fund type managers, they would be happy to take a view on a stock on a 1-year view. One of the things that has been very interesting, over the last 10 years that has been very noticeable, is that actually everybody is much more short term in their focus. I think part of that is probably driven by the hedge funds, which is then the second category of clients I was going to talk about.
If you don't have the hedge fund managers, who obviously A) are looking to sell short ideas as much as they are long ideas, but B) also tend to be slightly more aggressive in terms of their timing. At the front end of that, sort of the most aggressive of all, are the prop desks of big banks.
At the moment, I'm working in a boutique. We don't have a prop desk. If I was back in 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 do now actually, other prop desks through your clients. I'll be talking to other prop desk at the client, and they very rarely give too much of a stuff about fundamentals. They're much more driven on short term catalysts, the way the market - it's interesting because I know, from a technical point of view, you would want to look at a chart and see in a candle or in a open high/low close bar all the information that's in there. In the market when you're talking to the people who are actually driving the 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's quite interesting because there has been a lot of talk in various places where people are saying they don't take any notice of these people who've got the large volume of any of these patterns at all. Obviously, it sounds to me like they get an overall picture of what's going on and they make a decision based on that.
I've just got a question for you. You said you started 10 years ago in the industry. People are prepared to have a sort of long term, or 1 year view, and it's got shorter and shorter. Why do you think that's actually happened, why do you think it's suddenly come down to much more short term? I know it's been partially driven by hedge funds, but there must be other driving factors in that.
J: I think the markets have become more efficient and they react much more quickly to discount events. I think because the banks have gotten bigger, the prop desks. There is simply more money sloshing around effectively, and the more liquid the market the more efficient it becomes with discounting information.
P: Very good answer. One of the questions I wanted to ask you linked into that. You said you started 10 years ago. How did you actually get started in the industry?
J: As an analyst, there are two ways in, really. One is to come in onto a graduate scheme and have a look around at the bank 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 in the big houses. You get a very good education and obviously, they're picking people who are from the best universities and the best people at the interview process. You know you're getting a high caliber person through that.
The other route is to go into industry and find people who know the sector quite well. That's effectively how I got in. I'd had a career where I was trained as an accountant, ended up doing corporate financing in a company. It was a technology company at the rally up into 2000. As the whole banking industry is now extremely aware, it's exceptionally cyclical so with booms they just can't get enough people. In busts they fire them all again.
P: I was working for a technology-based company around about the same time and I remember the sort of boom that happened and they all disappeared very quickly. I guess it's just one of those things. So those are the two ways in. Are there any specific qualifications that are required to be an equities analyst? I know they pick top people -
J: Not really, like the rest of the city, obviously there is the FSA type of stuff, that you need from a regulatory perspective. I think the CFA, particularly in the U.S., the CFA is becoming - I'm not sure it's mandated.
P: What does CFA stand for?
J: I don't even know what it stands for. I haven't got it. [laughter] It might be Chartered Financial Analyst.
P: Okay, so it's some qualification.
J: You take 3 or 4 years. It's pretty difficult, actually. I think it's in 3 stages and certainly from what I've heard, from people who've done it, by the time you're doing the third stage, it is a real commitment. Quite a lot of accountants, similar to myself, were either ACA or management accounting qualifications. Obviously, you have to be completely conversant, able to dive into an annual report.
P: And understand it. I took an MBA myself, and there was a heavy emphasis on understanding company reports so I know what you're talking about there. The reason I was asking what it stood for is people listening to this may hear 3-letter acronyms and not actually know what they mean. It's basically a qualification.
J: I don't know that one either. I think it's the Chartered Financial Analyst, or maybe Certified.
P: Can I ask another question? How do you go about getting remunerated in the actual role that you're in? Do you get paid a bonus, a salary, or is there a combination? How does that work?
J: For me, in the places I've been, it's been a combination of the two. Every house will have a different way of doing things. There will be different weightings between bonus and basic comp. The bonus as well, whether that's cash or stock, varies from house to house. If you look at the other roles around, for example sales, at the end of the day you probably take home a similar sort of package in bonus as the sales person. But, a sales person is much more bonus heavy in that package. They'll have a relatively low basic and are very much incentivized through their bonuses, and it may be a very formal relationship in the sense that over a certain level they'll get a certain percentage of the commissions they generate, or something in that basis.
Analyst compensation is a bit more complicated. Again, post the Spitzer rulings, it's not legitimate to pay an analyst linked to the corporate deals that they - first of all, you're not supposed to use 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 the company you covered was involved in a big M&A deal or whatever else, the analyst's remuneration can't be influence by that.
You'd be naïve to think that a very influential analyst who is listened to by 1, 2, and 3 in the sector and on the street, who is obviously bringing companies in even if not explicitly themselves but companies are attracted because they know this guy has a reputation and it's something the bankers will talk about when they're pitching the bank to a client. Clearly, an analyst is going to get a degree of compensation which relates to his total value to the bank. It just can't be explicitly linked, and that's fair.
P: That's fair. I know the government is talking about restricting all these bonuses but in reality, it's unworkable I think.
J: It's totally unworkable. Already, you're seeing in the U.S. banks, which I think might be slightly further ahead of this; a couple of U.S. - the way they seem to be going about it is restricting amount of variable pay as a portion of the total. They've doubled basic salaries. That's in no one's interest because it ends up adding to your fixed costs. The whole point of the bonus is it allows you to really ratchet down on the costs when times are hard because you just don't pay bonuses.
P: I understand that and I think it's going to go the same way in this country. Of course, the other risk is it could just drive all the activity out of London. I think that's just daft. That's my view. I know I should be interviewing you, not giving my views.
Just another question for you, James. What are the hours actually like? You said a bit earlier you can be in at 7:00 in the morning. Is that normal?
J: The hours tend to be quite long. Again, they will depend a little bit on where you are. If you're at Goldman's or Merrill's or one of the bigger American houses, they're pretty brutal actually.
P: So a typical analyst -
J: You kind of marry the firm. You will work weekends. You're in at 7:00 for a morning meeting at 7:15 or 7:30. You're probably still at your desk a good 12, 13, 14 hours later. I've been there and done that and I think one of the interesting trends you're seeing at the moment, partly driven by some of the issues that have unfolded in the banking sector over the last couple of years; more and more experienced people are moving to small houses, such as I'm in at the moment, boutique type houses where you're possibly a partner in the firm.
It's much more of an environment where you feel you own and control the business that you're in. Because of that, one of the quid pro quos is when you've been doing it for a while, you get a bit older and you've got family and things to think about as well, the hours moderate a bit as well. My typical day, I'm usually in by about 6:45, which gives me a chance just to check there're been no overnight - my sector actually a fair bit of news comes out of the U.S., and to a degree Asia, so I need to make sure there's nothing there that affect companies that I cover. If there are, we have a morning meeting that starts at 7:15 so I need to be ready to have something written and present to the sales desk. To be honest for me, unless it's result season, I'm typically done by about 6:00.
P: That's still 11 hours. That's still quite a -
J: It's a reasonably long day.
P: If you count 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 into a long day. It seems like sort of a working day. I mentioned result season. The way I look at it, it's almost like a quarterly cycle. Each month within that cycle is quite different in term of the activities that you do.
If you think of a quarter, roughly speaking, earnings will come in one of those months. That's very much a case of you have to write your previews, you have to establish - your part of driving a consensus view for the stock in the sector that you're covering, in terms of the earnings forecast for the period. When the results come out, you then look at those, analyze those, pass comments back to your clients and the sales people take part in the conference call, the management meetings and everything else.
The month after that is typically quieter and you get an opportunity to write some sort of fundamental research. There might 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 particular reason and you try to explore that in a piece of fundamental research, which will 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 the client base. One of the bigger banks, which has sort of European and good U.S. exposure, you might spend 10 days in the U.S., a week in Europe, and a week in the U.S. - 2 or 3 days in London and perhaps a day in Edinburough.
P: So there is a reasonable amount of travel then, really.
J: Yes, in that sort of month. They overlap a little bit. It's not always neatly a month, but typically, 1 out of 3 you will be doing a lot of travelling to see clients and run through your sector.
P: You started talking about a typical day for you will start about 7:15 and then you have a morning meeting. What sort of things would you do throughout the day?
J: It varies, going back to what I was saying; it varies on which of those months you are in that quarterly cycle. At the moment, we're coming up to earnings season. I'm going through all my models. It's reasonably complex, the Excel models for each company, they cover forecasting what I think the quarterly results are going to be. That's a fairly insular job. Today, I'll pretty much have my head down and be going through those things.
If it's a results day, then the hours can go all over the place because a European company typically reports at 6:00 a.m. U.K. time so I'd be in at about 5:45, to have about an hour to look through those results and analyze those results, and write something ahead of the morning meeting at 7:15. Then it would be very unusual for a company to be bang in line with your forecast and not have to change your forecast.
P: It must be an interesting thing because if your forecast is accurate, then you're going to pat yourself on the back. If it's miles out, either positively or negatively, does that have an impact on what you're going to do?
J: Yes, because if you're miles out, let's say something's come in and beat your forecast, again it depends on if you're a seller or buyer in it, but depending on why, you might change your rating if it was very different. If it was different and you're the right side of it, in terms of your recommendation, you might upgrade your numbers for the rest of the year.
Of course, the market cares about where the consensus moves to. The question you'll always get, particularly the 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. When you're a small house it doesn't do that. The question you'll usually get in the morning meeting will be "That's fine. They beat your numbers by 2% or whatever. Relative to consensus, where will their results be and will consensus need to move it some numbers up or down"? In the days following the results, you get a series of upgrades and consensus forecasts move up then obviously, that's bullish
P; I see that. You do see those kinds of reports coming out on things like briefing.com for example. It will turn around and say, "Stock upgraded by such-and-such by Goldman," or something like this. You're obviously seeing it a bit later, but I know some people who like to trade things as they come out.
J: That's the interesting thing because in terms of the information flow, the market has acted on that information by the time the market opens at 8:00. By the time the retail market gets a hold of it, it's old news.
P: I gathered that, so it's a different situation for retail traders. Your typical day, at the moment, you're going to be working on reports. It sounds like you're basically crunching numbers, by the sound of things.
J: It's quite geeky, some of it.
P: I can understand that.
J: I'm not quite keen on that part.
P: I'm presuming you do take a break at lunch or do you just work straight through?
J: Most of us work straight through, actually, unless you're going off for a client lunch or something like that. The days of the 3-hour boozie lunches with your mates are pretty much over, or they were. In my 10-year career, they've never been around that much, partly because when I started off it was with an American bank and was never part of the culture anyway. Lunches are sandwiches at your desk.
P: Then you presumably work through until about 6:00 and then go home, I guess?
J: Pretty much, the sales people generally go out and see - it's quite an interesting dividing between who are friends and who are clients. There is a time, friends become clients, and clients become friends. It's a relatively small community. You go around at lunch time and you bump into people you know. It's that kind of atmosphere. If you go out and have lunch with somebody who is a friend, but they're also a client, that's the ideal situation really because it means you're actually enjoying the lunch, but you can do business as well.
P: Can I ask you another question? Have you got people 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's generally 1 or 2 person teams. In my previous existences, yes, because teams could be into double digits if it's a big sector. You typically have a senior publishing analyst and then maybe 1 or 2 associates supporting them. The way that would generally work is the publishing analyst is like the face of the stock, and sadly, the associates do all of the work.
P: It sounds like 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 my role, to the Head of Equities.
P: So it's fairly straightforward. Does he have a large number of people who report to him, or is it -
J: All the senior analysts report to him, and the Head of Sales reports to him.
P: Okay, has the credit crunch affected your sector of the industry, at all?
J: Yes, less badly 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 there is also the impact on the financial services, given that the credit crunch is affecting the people that I'm talking to and my clients are being made redundant, 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 it started to pick up a bit again, at the moment, I think you just said?
J: Well in the general industry yes, in banking yes, but in the industry I cover, not particularly. Things are evening out but you can see actually in the real economy, if you like, it's still incredibly difficult even though some of the financial commentators are starting think otherwise.
P: We're still seeing people being made redundant all over the country, and I know they said we're out of recession now but in reality, I think the impact of it has still not filtered through.
J: In theory, redundancy is a lagging indicator. In theory, before the economy starts to pick up, you will still be in a cycle of unemployment or net unemployment. Effectively, when employment starts to pull up - that's why the bull markets always climb a world of worry, and that's one of the things; you can have quite strong market recoveries on the face of expected recovery when the actual economic data in terms of jobless totals and whatever else still looks pretty bleak. That's absolutely classically where we are now. Talk to any of my companies and they're having a really tough time, but the financial services industry has picked up a little bit. The market has rallied enormously and people are generally a bit more optimistic than they were 6 months ago.
P: Linked to that is have you been affected by any of the various rescue packages and new legislation regarding financial institutions that the government has brought out?
J: I would have been had I been at one of my bigger employers, definitely. I'm working for a boutique bank which is a partnership owned by the people working here. We're under the radar and as far as I'm aware, we're not really impacted by any of the things that are being discussed.
P: It sounds as if you're better because obviously, it's had a big impact on the larger banks, hasn't it?
J: I think we suggested earlier, there are some very clever people who I think are always going to be one step ahead of the regulations. [laughter]
P: I think that's true. It's always been the case as well. Whenever laws are brought out for this sort of thing, people end up getting around them. It will continue.
J: I think what is definitely true, and you alluded to it earlier, the company that I work for has various offices around Europe. I think the partnership and domicile is the Netherlands, or Luxembourg or 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 in Frankfurt, but Geneva - yeah, I'd be very happy to go work in Geneva, no problem with that at all.
P: I know a few 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 not sure whether the regulators and politicians really realize - I think that's one of the big things that's changed with technology over the last 10 - 15 years. People are enormously mobile, while being able to be completely effective in their jobs. They can base themselves anywhere.
P: I completely agree with you. You see it in pretty much every industry, as well, outside the car industry, but you see it in the merchant-based industry. You can work anywhere in the world now, almost; it's changed dramatically. One other question I wanted to ask, James, is does your role attract much media attention? If so, is it warranted?
J: It only attracts 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 and early 2000, the famous sort of Henry Blodget type situation where they were privately calling stocks crap but then putting buys on them is totally unjustified and there was a huge media backlash against that. I think it's only fair that there should have been, and a regulatory backlash to follow.
In the sense 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 because of us. At that point, there was a lot of negativity. Frankly, it probably was warranted.
Moving on, the other side of it is analysts tend to get quoted in the press. Different banks have very different views to how they like their analysts to be represented in the media. Some are very pro because they think it raises the bank's profile. Some are very anti because they think it commoditizes what the analysts are doing. You can piss clients off if you say something on CNBC, but actually, they pay quite a lot of money to be told on a sort of client bespoke client basis. Different banks have different roles. We're not particularly media heavy here so I keep a fairly low profile. I'm happy with that.
P: That's a good point. One of the questions linked into this is what advice would you give to somebody who wants to become an equities analyst?
J: It depends where you are. If you're youngish and setting out on a career, I actually think the banks - I think this is true pretty much across the disciplines with the exception maybe of sales. I think the bank is a pretty brutal place to spend your twenties. I can think of better things to do than working 16-hour days as an associate in a division of the bank.
From a quality of life perspective, I would say get experience in a corporate, get the right experience because you need to be corporate finance, strategy, one of the kind of close to the CFO or CEO type functions, and then look for an opportunity in one of the bull markets to move across, taking that expertise with you. You'll always be a valuable person if you know the industry from the inside out. To me, that's the more humane way of doing it than doing it as a graduate where you write off your twenties in a series of 16-hour days, 7 days a week.
P: Some people get burnt out by that, as well.
J: Talking to people who have been in banks - again I was in this boutique and we weren't particularly affected because we were already very small. Talking to the banks where they did see big waves of redundancies, a lot of people have left the industry entirely, in that younger bracket because they couldn't see the upside.
You can argue if they go back, and you've got all these extremely talented people with very good qualifications in physics, maths, chemistry, and whatever else, a lot of them are apparently going into teacher training. That's not a bad thing.
P: It isn't but for the fact that they're talking about making about 3,000 teachers redundant 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 City of London doesn't drain quite as much resource from the universities as it has over the last decade or so, that's not necessarily a bad thing.
P: I see your point on that. I think I agree.
J: If you want to do it from the graduate route, then really, you need an extremely good degree from an extremely good university to get through the standard investment recruitment process, which is a pretty tough process.
P: You said that, which I suppose people are sort of open to apply for it. I guess the attrition rate is quite high for people applying for these positions.
J: It is and you've got to remember that although, if you're British and you're applying for work in a London bank, actually in practice, the London branches are the European offices for most of these banks - the main office, so not only are you applying against graduates from Oxbridge, the LSE, whatever else, but also from the best places in France, Germany, Switzerland, Spain, and Italy who are also all applying to come and work in London because it's the European capital of finance and it's where the European bank offices are all headquartered.
The competition at the graduate stage is hugely intense. Frankly, it's probably another reason why you're better off, I would say, if you definitely know you want to be an analyst, doing it through the industry that you have an interest in and coming in later from that space. The problem is, in reality when people are at that stage of applying, they don't necessarily know what they want to do other than they want to work in a bank or in financial services.
P: I think it's the glamour image that people have about being involved in this kind of industry, isn't it, a lot of time. "Yes, I definitely want to do that," but like you say -
J: It's classic quid pro quo; you do get paid well, there's no doubt about that. You do give your pound of flesh in return and it could be a tough life, particularly in the early twenties. I think particularly because you don't have the glamour side of it. You'll obviously get paid reasonably well, but you won't be a publishing analyst, you won't see your name on reports. You'll be doing all the donkey work, the spreadsheets, and everything else but without seeing the glamour part of it, which is important to some people and keeps them going.
P: I suppose it depends what you want from your career, really. There are people who would like the publicity. There are other people who are probably quite happy not to be in the public eye. It really depends on what you desire, but it sounds like regardless of what you desire, there is a very high level of competition for any of these positions anyway.
J: That's true of investment banking, generally.
P: Okay, James, I don't know if there is anything you wanted to add to the conversation. Have you covered pretty much everything?
J: I think we've covered most of the stuff. Hopefully, it will be of interest to people who are looking at the website.
P: I'm sure it will.
J: I don't think there's anything we haven't really touched on.
P: I think we've pretty much covered everything and I think it will be an interesting article for people to listen to. I hope they enjoy it. That's great. Thanks James.
J: Alright Bye
P: Bye
P: This recording is copyright ©, Trade2Win Ltd., 2009, all rights reserved.
You can listen or download this interview by clicking this link:
Equity Analyst Interview
Last edited by a moderator:
