In ve s t m e n t Ma n a g e m e n t Gra d u a t e P ro g ra m m e

Graduate Programme

GREY MATTER
Investment Management
MATTERS
MORE THAN
S UBJ ECT
MATTER.

Your de gre e ma y have q ualifie d you to c ritic a lly dis c us s the works of Cha uc er or give a
detailed ac count of the effect of glaciation on the coas tlines of Europe. Its als o given you
s omething much more valuab le; the mental tools and aptitude to lea rn und ers tand analys e
and e plain. t aillie ifford our bus ines s hinges on your ability to und ers tand companies
and the world around them s o we can inves t ove r billion in clie nt as s ets .
s a grad uate in our Inves tment ana gement p rogramme you will work with s enior und
anagers and Inves tment nalys ts in s mall teams to review inves tigate s ummaris e and
p rovide recommend ations on the c ompanies we inves t in. You might be thinking a bout the
impa ct of d igita l dis tribution on cre ative artis ts d is cus s ing how a c oup d tat is going to
a ffec t the s upply of mobile phones or pres e nting your re port on the impa ct of ilipino
c ompetition on India n ca ll ce ntre s . ne thing we c an guara nte e; youll b e us ing your
brain and the s kills that earned you a degree.
If you a re e cited by the pros p ect of a career which combines intelle ctual rigour a nd
fas c ina ting debate with an e c ellent s ta rting s ala ry and a central Ed inburgh location
its clear youll want to find out more.

s t a eg o rd . o m g ra d u a t e s

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GRADUATE AND INTERN OPPORTUNITIES

Investment management. Fund management. Portfolio management. Asset management. What we
do goes by a number of names but it all boils down to making intelligent investment decisions on
behalf of our clients. We make these decisions by carefully researching everything about a
potential asset to nd out whether its the right place for our clients money. his is called bottom up
stock picking.
oining us as a graduate intern or even on our pring Week will show you e actly what that means.
We have opportunities in uity esearch Fi ed Income Fidelity olutions ales arketing
perations usiness anagement uman esources and echnology. We dont e pect you to
come straight in and know everything about what we do. oull start your placement with a solid
induction during which youll be introduced to investment management and how it ts into
the ity. For more information on application deadlines and how to apply visit
www. delityrecruit e t.c

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LONG-TERM I NVESTMENT

COULD I T BE YOU?

M&G is one of Europes largest investment management

companies, with 248.3 illion fun s un er management.
e have e citing opportunities for gra uates, interns an
apprentices. e are loo ing for right, namic trainees to
uphol our prou tra itions of mar et lea ing innovation an
performance. ur evelopment programmes will e uip ou with
all ou will nee to e cel with us.

isit www.mandg.co.uk/graduates
for more information

s at 3 March 2 4. M&G is an e ual opport unit ies emplo er an welcomes applicat ions from a iverse
ac groun . M 4 4 3
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Issued in June 2014 by Schroder Investments Limited, 31 Gresham Street, London

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I T TI
istory.............................................................................................................................

nvestment anagement vs. nvestment an ing ..............................................................

T
hapter : uy-side vs. ell-side
obs on the ell-side ......................................................................................................

obs on the uy-side ......................................................................................................

ompensation ................................................................................................................

hapter : nvestment tyles

he rive for iversi cation .............................................................................................

ypes of ecurity............................................................................................................

is haracteristics of nvestments ..................................................................................

ypes of onds and heir is ro les ............................................................................

Alpha vs. eta and otic eta........................................................................................

is Analytics ................................................................................................................

ortfolio onstruction .....................................................................................................

ow s his elevant to y ob earch ...........................................................................

hapter : inancial esearch rea down

esearch tyles..............................................................................................................

apital tructure: uity vs. i ed ncome .......................................................................

esearch oles: raditional vs. Alternative Asset anagers ................................................

hapter : he lients of Asset anagers

etail unds ..................................................................................................................

nstitutional nvestors .....................................................................................................

igh et orth .............................................................................................................

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TTI I
hapter : argeting our ob earch
etting the nterview .......................................................................................................

reparing for the nterview ...............................................................................................

hat hey ant ..............................................................................................................

here o ou it ...........................................................................................................

hapter : ho Are the Asset anagement mployers

A asic rea down: arge eneralist irms vs. pecialist irms ..........................................

A loser oo : iring rocess ros and ons .....................................................................

s his irm ight for e ................................................................................................

T
hapter : ortfolio anagement
he hree egments ........................................................................................................

enior ortfolio anager ..................................................................................................

Associate ortfolio anager..............................................................................................

ortfolio anager Analyst .................................................................................................

ortfolio mplementers.....................................................................................................

hapter : nvestment esearch

enior esearch Analyst ...................................................................................................

nvestment esearch Associate-Analyst .............................................................................

nvestment esearch Associate .........................................................................................

Alternative ntry oints....................................................................................................

hapter : ar eting ales and perations

Account and roduct anagers.........................................................................................

roduct anagement Associates .......................................................................................

Account anagement Associates ......................................................................................

ar eting pecialists.......................................................................................................

usiness Analyst .............................................................................................................

is Analyst ....................................................................................................................

ystems eveloper...........................................................................................................

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hapter : ays in the ife

nvestment Analyst at aillie ifford .................................................................................

nvestment Analyst at lac oc ......................................................................................

uropean ales and ar eting raduate at idelity orldwide nvestment ...........................

nvestment raduate, nvestment anagement td. ...................................................

ommercial anagement raduate, nvestment anagement td. ...............................

Analyst at chroders. .......................................................................................................

Analyst at chroders. .......................................................................................................

I
lossary
lossary of erms ............................................................................................................

Valuing a ompany
atio Analysis .................................................................................................................

iscounted ash low Analysis..............................................................................

TT T

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in od c on
o you en oy following the nancial markets, whether reading the Financial Times, watching loom erg
or checking stock prices on the internet o you want to earn good money If so, you may nd a career
in investment management appealing.

Investment management, also known as asset management, is pretty much what it sounds like
a client gives money to an asset manager, who then invests it to meet the clients o ectives. In
other words, investment management seeks to grow capital and generate income for individuals and
institutional investors alike. The potential clients of an asset manager can vary widely. sset managers
who work for mutual funds, for example, manage money for retail clients, while asset managers
at investment anks often invest money for institutional investors like companies or municipalities
often for pools of money like pension funds . sset managers can also work for hedge funds, which
com ine outside capital with capital contri uted y the partners of the fund, and invest the money
using complex and sometimes risky techni ues, attempting to receive extraordinary gains.

sset managers uy their stocks, onds and other nancial products from salespeople at investment
anks, who are on what is called the sell side. sset managers are on the uy side. ecause
they make commissions on every trade they facilitate, salespeople provide information research,
ideas to asset managers, in an effort to get the asset managers to trade through them. or this reason,
salespeople often shower asset managers with perks like sports tickets and expensive dinners at
fancy restaurants. sset management asically oils down to this researching and analy ing potential
investments, and deciding where exactly to allocate funds.

Investment Management vs. Asset Management

The terms investment management and asset management are interchangea le. They
refer to the same practice, the professional management of assets through investment.
Investment management is used more when referring to the activity or career i.e.,
Im an investment manager or That firm is gaining a lot of usiness in investment
management , whereas asset management is used more with reference to the industry
itself i.e., The asset management industry .

In recent years glo al nancial services companies and investment anks made efforts to grow
their asset management usinesses. Thats ecause investment managers fees are ased on the
amount of money theyre given to investso as long as they have clients, theyll make money for the
ank. This fee ased arrangement stands in contrast to usinesses like mergers and ac uisitions
advisory, which can e highly varia le depending on market conditions. ut even the relatively sta le
asset management industry felt the impact of the and glo al recession ittery investors,
fro en credit markets, the collapse of several ma or anks and proposed regulatory overhauls meant
uncertainty for everyone in nance. ome rms that were attered y the recessionincluding the
investment ank redit uisse and insurance giant I put their asset management divisions up for
sale, spinning them off to raise capital to cover losses in other divisions. To e sure, the effects of the
worldwide nancial crisis are far from over. any of the worlds largest investment anks, including
oldman achs, organ tanley, redit uisse, arclays and , have had to signi cantly scale

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ack their operations and staff due to nancial regulation, higher capital re uirements, and weakening
e uity and de t markets in the crisiss wake. In fact, from through the rst half of , many
of the worlds largest anks announced o cuts, with some, such as , ank of merica, redit
uisse, organ hase and arclays, announcing thousands upon thousands of cuts.

These o losses only underlined the recent volatility of the worlds markets, which had also een
rocked y some ma or de t crises, particularly those occurring in reece and the . In ,
reece, on the verge of defaulting on its national de t, received a multi illion dollar ailout package
from the International onetary und. eanwhile, the country proposed rather severe austerity
measures spending cuts and tax increases that were protested y thousands of reeks. s a result
of the crisis, many of the worlds largest nancial institutions that held reek onds were adversely
affected, having had to write off illions of dollars in loans to the country.

y the spring of , the situation in reece had worsened to the point that many economists
elieved it was likely that the country would default on its de t and leave the euro one, meaning
reece would return to its former currency, the drachma. The economies of ortugal, Italy and Ireland
among others were also severely attered. oth ortugal and Italy saw their de t downgraded y
tandard oors in early . nd in rance, whose de t also experienced a downgrade from
to , a series of austerity measures and a rising unemployment rate led to the historic ouster of its
conservative resident icolas arko y in ay . In arko ys place, rance elected the socialist
rancois ollandethe rst socialist president elected in the country in nearly two decades. fter
the vote, euters noted that arko y was the th euro one leader in succession to e swept from
power since the currency locs de t crisis egan in .

nd across the tlantic, the , which had served as the epicenter of the worldwide nancial
crisis of , faced a de t crisis of its own in . The country, deep in de t, was in danger
of default, as well as in danger of its credit rating eing lowered. ltimately, after a month long
and very heated de ate that divided the country, the ouse of epresentatives and
enate voted to raise the nations de t ceiling and enact a plan to reduce spending over the next
decade. lthough the vote meant that the avoided defaulting, it underscored the fact that
the economy was still in disarray, and tandard oors agreed, downgrading de t from
to in .

f course, since the worldwide nancial crisis of , nancial regulation has taken center stage
in the as well as in urope. In the , the much pu lici ed and de ated odd rank ct was
enacted in . The act, the most signi cant piece of nancial regulation in the since the s,
increased restrictions on hedge funds and private e uity investing, and increased transparency in
derivatives trading and regulation of credit agencies. In addition, the so called Volcker ule portion
of the act more or less prohi ited anking institutions from engaging in proprietary tradingthat
is, trading their own accountswhich was largely seen as one of the main causes of the nancial
crisis of . s a result, rms like oldman achs and organ tanley were forced to reak off
their proprietary trading units in and , signi cantly altering the landscape of the worldwide
investment management industry.

n increased focus on regulation has also meant new regulatory odies. In the announced
the creation of three new nancial regulatory agencies. nd in the announced the
a olishment of the more than year old inancial ervices uthority , creating, in its place,

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the inancial onduct uthority and rudential egulation uthority. mong other things, the new
regulatory system hopes to etter protect investors y making investment management advice and
transaction charges more transparent. It also aims to more closely police anks and etter prepare
for and prevent any future nancial crises.

ince the end of , most uropean nations economies, as well as the nited tates economy,
have for the most part re ounded. In , uropean stock markets had their est year since ,
and talk of the reakup of the euro one has largely uieted in the , stock markets had their est
year since , as the rose per cent. eanwhile, in sia, apans ikkei index rose more
than percent in . owever, y ay , stock markets across most of the world had fallen,
and most of the economies in the euro one were still struggling. till, most industry o servers agree
that, today, most nations have put the worst of the nancial crises of and ehind them.

What all this means is that, although there is a lot of uncertainty in the worlds nancial markets
and among its top nancial services rms, it is sure to e an exciting and interesting time to work in
nanceand, in particular, in the investment management industry.

The Vault Career Guide to Investment Management will serve as an insiders guide for careers in
the industry. It will provide you with the knowledge to appropriately target your career search and a
framework to handle the most challenging interviews. It will also reak down the many different career
positions that are availa le to oth undergraduate and graduate students.

I T
he beginnings of a separate industry
The process of managing money has een around for approximately years. t its outset, investment
management was relationship ased. ssignments to manage assets grew out of relationships that
anks and insurance companies already had with institutionsprimarily companies or municipal
organisations with employee pension fundsthat had funds to invest.

These asset managers were chosen in an unstructured way, with assignments growing out of pre
existing relationships rather than through a formal re uest for proposal and idding process. The
actual practice of investment management was also unstructured. sset managers might simply
pick stocks they thought were good investments as there was nowhere near as much analysis on
managing risk or organising a fund around a speci c category or style. istorically, managed assets
were primarily pension funds. Traditional and alternative asset classes such as retail funds, hedge
funds and private e uity had yet to mature.

he rise of the retail fund

istorians cite the closed end investment companies launched in the etherlands y ing William
I during as the rst retail funds, while others point to a utch merchant named driaan van
etwich whose investment trust, created in , may have inspired the idea. The oston ersonal
roperty Trust, formed in , was the rst closed end fund in the .

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The rst modern mutual fund was created in , when three oston securities executives pooled
their money for investment. etail funds were normally used y nancially sophisticated investors who
paid a lot of attention to their investments. They really came to prominence in the early to mid s,
when mutual fund investment hit new highs and investors reaped impressive returns. uring this time,
investor sophistication increased with the advent of modern portfolio theory and asset management
rms egan heavily marketing retail funds as a safe and smart investment tool, pitching to individual
investors the virtues of diversi cation and other ene ts of investing in retail funds.

Modern Portfolio Theory

odern ortfolio Theory T was orn in , when niversity of hicago economics
student arry arkowit pu lished his doctoral thesis, ortfolio election, in the Journal
of Finance. arkowit , who won the o el ri e for economics in for his research
and its far reaching effects, provided the framework for what is now known as odern
ortfolio Theory. T uantifies the enefits of diversification, looking at how investors
create portfolios in order to optimise market risk against expected returns. ssuming all
investors are risk averse, arkowit proposed that when choosing a security to add to
their portfolio, investors should not ase their decision on the amount of risk an individual
security has, ut rather on how that security contri utes to the overall risk of the portfolio.
To do this, arkowit considered how securities move in relation to one another under
similar circumstances. This is called correlation, which measures how much two
securities fluctuate in price relative to each other. Taking this into account investors can
create efficient portfolios, ones with the highest expected returns for a given level of risk.

raditional vs. alternative asset managers

y the early s, the investment management industry had egun to mature as retail funds and
other asset classes gained prominence. The dominant theme over the past decade has een the
proliferation of alternative asset managers. It is necessary to make the distinction etween traditional
asset managers and alternative asset managers. Traditional asset managers, such as retail funds,
are highly regulated entities that are governed y strict laws. In the , the inancial ervices
uthority is the principal governing ody, and its rules are designed to protect investors and
limit unnecessary risk taking. Traditional asset managers have de ned investment mandates that
determine what types of securities and strategies they can pursue in a given portfolio. These strategies
are discussed in detail in further chapters.

lternative asset managers include assets classes such as hedge funds, private e uity and venture
capital. or much of their existence, the hallmark of these investment vehicles was light or nonexistent
regulatory constraints and their freedom to operate without de ned investment strategies or transparent
risk tolerances. s a result, these asset classes evolved almost without correlation to the road stock
and ond markets, and sought to provide alpha returns in a variety of economic situations. edge
funds, for example, are high risk money managers that orrow money to invest in a multitude of stocks,

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onds and derivatives. They use a large e uity ase to orrow more capital and therefore multiply returns
through leveraging. lternative investments can e extremely lucrative, ut they are also extremely risky, so
individual investors who wish to oin this high ying world must e accreditedin other words, they need
to have suf cient net worth, typically six gures and up, to invest. ecently pension funds have ecome
ma or investors in hedge funds, hoping to reap the same outsi ed returns as other high net worth investors.

urope holds its own

The nited tates is the worlds leading country when it comes to assets under management with
a out per cent of the worlds assets under management. ut the has recently grown to oin the
as a ma or market for fund management. t the close of , efore the worst of the credit crisis
struck, fund managers were responsi le for a record . trillion. or all of urope, assets under
management totalled . trillion at the end of . This gure dropped to around . trillion y
the end of , ut rose to trillion y the end of .

nsettled times
ow did the credit crunch hurt the asset management industry irst and foremost, the lack of credit
meant a lack of leverage for fund managers, which reduced the si e of the ets they could make and
there y lowered returns. pinoffs, sales and downsi ing at ma or investment anks made an additional
impact on those anks asset management divisions. Ironically, the fact that some asset management
divisions performed well despite the crisis made them more likely to e sold, ecause anks knew
theyd e attractive on the market.

s an example, itigroup sold its own asset management division in . ut as one of the hardest
hit anks in the credit crisis, iti was forced to continue divesting units that werent part of its
traditional anking usinesses, so in it sold its entire stake in apanese asset manager ikko
sset anagement. The trend continued in urope arclays put its successful asset management
division, arclays lo al Investors, up for sale in order to streamline itself and oost capital ratios, and
the eleaguered ommer ank sold its wiss asset management unit to iechtenstein ased asset
manager T roup. ocussing on core anking activity was the name of the game for attered
anks around the world.

ifferent inds of deals

onsolidation in the asset management industry is hardly a recent development. In the last two
decades, over rms have merged or com ined forces merican investment management giant
lack ock owes much of its clout to ac uisitions, including its purchases of tate treet esearch
anagement, errill ynch Investment anagers, uellos apital and apital anagement, all
deals that closed etween and early . nd in une , lack ock announced that
it would pay . illion for arclays lo al Investors, a transaction that made lack ock the
iggest money manager in the world as of pril , lack ock had . trillion in assets under
management . ne month later rdit gricole and ocit nrale unveiled a deal to com ine their
asset management operations into a single entity, which controlled illion of assets at closing
and ecame uropes fourth largest asset manager.

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ergers and ac uisitions in the asset management industry were hot during , with plenty of
takeovers y private e uity rms and lucrative sales of hedge fund assets. In fact, over a do en
transactions in were valued at illion or more. owever, in ust three deals fetched such
high prices, and disclosed deal value was ust . illion, compared to . illion in . nd no
wonder almost two thirds of the transactions in the second half of were related to divestitures,
evidence of sellers distress and the need to offer units at re sale prices. In another shift, investment
anks and insurance companiesma or uyers of asset management rms in the late s and
early s ecame sellers, unloading their purchases to private e uity uyers or entering into
strategic partnerships to form pure play asset managers.

In , the deals kept coming and, overall, for the year, illion in assets under management
changed hands, either as part of ac uisitions or divestitures.

In , glo al deals in the asset management industry saw a slight increase versus , ut
deals slowed signi cantly in . In fact, according to a report pu lished in e ruary
y ricewaterhouse oopers, which closely analy es the asset management industry, Volatile
markets, increased regulatory and economic uncertainty, decreasing availa ility of de t funding,
and differences in valuations etween uyers concerned with overpaying and sellers reluctant to
accept lower prices made the least active and lucrative year for mergers and ac uisitions
in the glo al asset management industry since . owever, did see a few large deals,
including enderson roups million ac uisition of ritish rm artmore Investment
anagement, and Invesmentaktie olaget atours million ac uisition of wedish rm aekl
. w also noted in its report that potential divestiture of asset management divisions y
uropean anks, continuing improvement in valuations and stronger interest from uyers are likely
to make a etter year.

Bigger, not necessarily better

ig firms in the index tracking usiness have limited costs. owever, eing too ig and
trying to eat the market can e a disadvantage. The igger a portfolio is, the more likely
it is to resem le the market. That is why there has een a rise in the num er of outi ue
managers, smaller firms that concentrate on niche markets and try not to get too ig in
order to keep returns high.

This proved to e the case. ccording to andler eills sset anager Transaction eview,
investment management deals rose . per cent in the total assets under management
that changed hands e ualed . trillion. The reasons for the rise included improving stock markets,
the fear of rising taxes and nance rms selling off non core units. Three of the largest deals of the
year in the investment management sector were anus apital roups illion sale of a minority
stake to ai ichi ife Insurance, ocit nrales illion sale of T W roup to the arlyle roup
and T W management, and ridgewater ssociates . illion sale of a minority stake to the

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Texas Teacher etirement ystem. In all, deals were announced during total deal volume
for the year was . illion.

In , the num er of deals increased to , while total deal volume rose to . illion. ome
of the largest deals of included lack ock uying redit uisses T usiness, chroders
purchasing a enove apital, and redit uisse ac uiring organ tanleys uropean and iddle
ast wealth management usiness.

he world is watching
The second half of saw unprecedented government intervention in the nancial sector. The
ederal eserve ailed out investment ank ear tearns and engineered a hasty sale to
organ hase amidst controversy that has yet to settle, merican authorities later allowed
ehman rothers to collapse, and the remains of ehmans usinesses were snapped up y several
international uyers. In the , more than illion was poured into a ank ailout plan. mong
the largest recipients of funds were loyds T , plc and the oyal ank of cotland loyds
and were su se uently com ined to form the loyds anking roup. imilar stories played
out in rance, ermany and Italy. These capital infusions came with strings attached, like increased
lending re uirements, new leverage rules and limits on executive compensation and onuses.

Indeed, the lasting legacy of the world nancial crisis may e tougher regulations and heightened
scrutiny of executive compensation. edge fund owners, alternative asset managers and investment
ankers have een criticised for taking home millions, if not illions, while others scrape y on
unemployment ene ts and food stamps. Those nanciers who made their windfalls y shorting
the su prime unk that created the crisis have drawn extra ire. In , the s inancial ervices
uthority drafted new codes designed to minimise what it calls excessive risk taking y tying
compensation to risk management. The codes touched on everything from makeup of remuneration
committees to mandatory annual reports on pay and performance measurement. In it was
announced that the s inancial ervices uthority would e replaced y two new regulatory
agenciesthe inancial onduct uthority and the rudential egulation uthority. The ank of
ngland would also takeover some of the regulatory duties of the .

nd in the third uarter , new regulation went into effect in urope that altered the manner in
which trades are executed in the worlds trillion over the counter T derivatives market.
In the past, the T derivatives market was largely self regulated the aim of new regulation is to
increase transparency and li uidity and decrease risk, thus mitigating the likelihood that trading in
T derivatives will uickly strain the health of nancial rms like it did during the nancial crisis
of . To that end, new regulation mandates that trades e cleared through central clearing
counterparties, thus making T derivatives more like exchange traded nancial instruments.

erhaps underscoring the need for such regulation, in the second uarter of it was revealed
that a ondon ased trader with organ hase the trader was nicknamed The ondon Whale
y the media had placed a massive et in the credit derivatives market, leading to the loss of
more than illion. In the aftermath of the revelation of the loss, organ hases market
capitalisation fell y illion. amie imon, the of organ hase, had previously een
an outspoken opponent of much of the new securities regulation in the , fervently lo ying

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against the odd rank cts so called Volcker ule, which limits anks a ility to trade their own
capital. ut after the ondon Whale controversy, imon lessened his criticism of new securities
regulation, even going as far as saying, in one pu lic speech, I dont disagree with the intent of
the Volcker ule.

ension reform, controversy and opportunities

Throughout urope, pension reform has ecome a politically explosive topicone thats eing watched
closely y anks in ondon, rankfurt and ew ork, not to mention millions of workers across the
continent. The pro lem, uite simply, is that uropes population is getting older. ro ections suggest
that in there will e million more people aged to than there was in . eanwhile,
the num er of people aged to , the so called working age population, is expected to decrease
y . million over the same period of time. inlands ratio of pensioners to workers is the highest in
urope it will reach per cent y .

ension schemes in urope follow a pay as you go arrangement, which means that money paid
into the retirement system y todays workers is immediately transferred to todays retirees. s the
ratio of pensioners to workers increases, there will e greater urden on workers to pay for their
retirements. overnments in Western and astern urope are taking two key steps to address this
pro lem rst, theyre gradually raising the minimum retirement age. econdand more importantly,
from an investment managers point of viewthey are shifting responsi ility to private investment
plans, instead of state run pension schemes. t the same time, many nations are increasing the
re uirements for de ned ene t contri utions. While these changes have prompted union strikes and
street protests in some countries, they present opportunities for investment managers in urope, who
are now marketing a variety of investment options to younger workers.

heres always tomorrow

s long as there are assets and investors who desire yields, whether from risky short term ventures
or more secure long term investments, there will e an asset management industry. nd though the
glo al economy may e edging its way toward a recovery, the effects of the economic crisis will e
felt for some time. redit is neither as cheap nor as plentiful as it was efore the crunch, and many
investors have sharply reduced tolerance for risk and exposure to volatile e uities.

In a way, however, the grim headlines of and early helped prove the value of reputa le,
skilled investment management professionals. s uropean pension funds reported record de cits,
more and more workers turned to private investment plans to secure their futures. isgraced merican
nancier ernie adoff rought the phrase on i scheme to reakfast ta les around the world,
as details of his illion swindle were uncovered y authorities. Tragically, many of adoffs
victims lost their life savingsand pulling hedge funds under regulatory control is now a priority for
the nited tates and urope. iven the amount of suspicion in the media and in pu lic opinion,
investment management rms that can esta lish themselves as trustworthy nancial guides will e
a le to distinguish themselves.

s part of uropes nancial services industry, asset management has ecome increasingly important.
ondon is now one of the worlds top centres for international fund management, and urope holds
approximately one third of the worlds investment fund assets.

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onvergence
The uropean asset management sector has recently experienced massive convergence etween
traditional and alternative investment styles. edge funds, private e uity funds and traditional asset
managers are competing increasingly closely as the lines etween the asset classes ecome lurred.
Investors increasingly understand how to invest and which investments could generate higher returns
in a regulated environment. egulators have realised this and are now offering traditional asset
managers new exi ility as long as investors remain protected.

The search for the alpha has aided the process. Traditional asset managers have een uying hedge
fund outi ues for some time. ut now the difference etween these usinesses and their core
investment strategies are disappearing. ong only managers are also using regulatory devices such
as IT III and soon, IT IV to offer hedge fund products for retail investors and other products
to widen the choice for their institutional investors.

eanwhile, alternative asset managers are reaching a wider audience among investors through
regulated fund vehicles and eschewing offshore domiciles of the ari ean and the ritish Isles
for mem er states, such as uxem ourg. ven the staid uropean pension fund industry holds
approximately per cent of its assets in alternatives, including hedge funds, private e uity and real
estate funds, according to the lternative Investment anagement ssociation I , the glo al
hedge fund association.

U IT
IT , ndertakings for ollective Investment In Transfera le ecurities, is a uropean
irective first enacted in y the uropean ommission. The main point of IT
is to ena le funds to e passported to other countries and sold with minimum
interventions y national governments and regulators. Indeed, international regulatory
arriers have een eroded y IT , accelerating the development of the cross order
funds market. IT III, ena led in , provides increased investment flexi ility y
expanding the investments in which a fund can take positions.

ext up IT IV, which has een approved y the uropean arliament and took effect
in . IT IV will simplify administrative re uirements for cross order distri uted
funds, and will give management companies a passport to manage funds across orders
without having to go through a service provider in the funds domicile. ecause of these
and other enhancements, the new directive is expected to increase the num er of small
funds that merge into mega funds capa le of cross order distri ution. t the same time,
IT IV aims to strengthen existing regulations with provisions for greater transparency
to investors and re uired disclosures y funds.

There is convergence among alternative assets, too. rivate e uity houses and hedge funds are fre uently
adopting similar investment strategies. heap credit, low volatility and rising e uity markets encouraged
hedge funds to enter the private e uity market until the credit crisis lew up. ore strategically, hedge

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funds are increasingly ring fencing capital for illi uid investments, similar to those made y private
e uity. ecently they have deployed these investments up and down the capital structure, including
second lien and me anine de t products. rivate e uity houses have ac uired undervalued assets
and usinesses through pu lic market deals. any experts suggest this could lead to further growth in
hy rid alternative investment rms. We will expand upon this in more detail in hapter .

ac and forth between bonds and e uities

onds are safe and e uities are risky, or so the theory goes. xperienced fund managers know
the real trick is to maintain diversi ed portfolios, spreading risk etween stocks and onds. If the
recent economic crisis taught us anything, its that even safe ets arent necessarily safe. till, in
times of uncertainty investment assets tend to ow into onds. Thats precisely what happened in
the during the s, when stagation ran rampant and e uities were performing poorly. These
conditions sent investors ocking to secure onds like government de t.

The advent of high performing tech stocks in the early and mid s made e uities more attractive,
ut then the dot com u le urst and ruined the party. ccording to some estimates, pension funds
moved illion out of e uities and into onds in alone. rief shift ack to e uities was
spurred y weakening ond yields and economic growth until the credit crisis set investors running
ack to high uality de t, like investment grade corporate and government onds.

ye on e change traded funds

s the name implies, exchange traded funds are ought and sold on stock exchanges, and some say
they are undermining the traditional usiness model of asset management. ne things for certain,
T s have grown exponentially in recent years from eptem er to ay , almost illion
T shares changed hands each month. or the same period in to , T volume averaged
ust . illion shares per month. ccording to industry estimates, T assets will reach . trillion
y . s of arch , glo al assets under management in T s totalled . trillion, up more
than per cent since mid .

emarka ly, the urgeoning T market is less than two decades old. These instruments were
invented as open end index funds that are like mutual funds in many ways underlying the T is a
undle of assets and securities in which investors hold an interest. The difference is that stakes in
an T are easy to uy and sell through a retail roker uy now, sell tomorrow, repeat. ately more
complex T s have made their way to the market. These include hedge fund T s and leveraged
T s, which seek higher than standard returns y relying on futures options, swaps and other exotic
derivatives. In spring and summer , leveraged T s were the su ect of regulatory scrutiny, as
the inancial Industry egulatory uthority issued warnings that leveraged T s might e too
risky for retail customers.

ore than ust investment

ore than ever asset management companies are focusing on more than ust investing. usiness
decisions such as marketing and distri ution, glo al growth and technology integration are ecoming
increasingly important factors in the success of investment management rms. While this guide will
focus mainly on developing a career on the investment side of the investment management industry,

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we will also spend some time discussing the growing alternative career opportunities relating to these
non investment usiness issues.

I V T T TV .I V T T I
Investment management provides a relatively sta le career when compared to some other nancial
services o s, relying on not ust the infusion of new cash into funds ut the task of managing money
already in the system. Institutions such as pains V sset anagement or cotlands erdeen
sset anagement are paid a set fee from their clients as a per centage of assets under management,
so they will continue to pro t simply y managing money. Theres no dou t that downward cycles
in the glo al economy can disrupt fees that involve performance incentives, especially when the
downswing is as severe and systemic as the recent crisis. lus, when investors get spooked there
may e fewer new assets to manage. ut generally speaking the asset management usiness is less
cyclical than its nancial cousins like investment anking.

onsider the hallmarks of investment anking I s and mergers and ac uisitions. When times are
good, theres a lot of money to e made in these activities. ut when the deal pipeline slows down
ecause of economic conditions, transaction fees simply dont materialise. That means ankers get
laid off, or I anks free e hiring, or oth. These swings in fortune can happen very uickly, as we
saw in . uring the rst half of the year deals were ooming and I ankers were ush with
cash, perks and onuses. Then the credit crunch hit, and pink slips ew over , nancial
services professionals lost their o s in , many of them investment ankers. The I ankers who
remained were initially faced with signi cantly smaller payche ues. ccording to ondons entre
for conomics and usiness esearch , ankers in the ity received a total of approximately
. illion in onuses at the close of . ut that gure rose to illion for . nd for the
month period ending pril , onuses rose to . illion. owever, for the year ending pril
, onuses slipped to . illion. This didnt mean that ankers made less money due to the
media and regulatory focus on onuses, anks increased salaries y a out per cent while cutting
ack on onuses.

erhaps this is what led the former chief executive of the inancial ervices uthority to speak out
against the itys ankers in pril . ector ants, after his last speech as the head of the ,
told the Guardian, If I had een a senior ank executive in the last three or four years I would have
taken a different view a out individual pay levels than many, ut not all, of the anks did. I think that
would have een a very good signal, which would e part of the restoration of trust. The trust ants
alluded to was that etween nancial services executives and shareholders in nancial services rms,
a trust that had een roken in the fallout of the nancial crises of . ants went on to criticise
executives of leading nancial rms, asking, hould there not e some level of expectation that
people entrusted with the leadership of nancial services organisations ultimately are driven y the
desire to do the right thing Its called integrity and it is what we all, as users of nancial services,
expect of the leaders of the sector. In une , ants relin uished his post as head of the .

nlike the salaries and onuses of investment anking professionals, analysts and associates at
investment management rms ene t from the fact that assets are always eing invested, even in ad
times. Investment management rms also tend to have a diverse client ase that includes pension
funds, insurance companies, anks, mutual funds and high net worth individuals, and portfolio
managers can make money for their clients in a num er of ways. viously, they want to play the

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market and make returns, y investing in a lucrative I , for example. ut even if there are fewer I s
taking place, managers can still make gains with smart plays in other asset classes, or y investing
existing capital in various portfolios. ear market may force portfolio managers to e extra cautious
in their investments, ut they will always have choices. eanwhile, their I anker friends will either
have capital raising and advisory assignments ... or they wont.

s one staffer in the operational department of a ma or asset management rm says, Investment

ankers normally only have a single stream of customers and are doing the same thing day in day out.
lso, the sell side is driven y the re uirements of the uy side. The link etween investment ankers
to investment managers might e sym iotic, to some extent, ut those managing money have more
options to guarantee their survival.

ours
The investment management industry tends to have a work load that varies. Working at a mutual or
hedge fund typically means hours dictated y when the market opens and closes, and in many cases
alances out to a fairly normal schedule. and a o at a private e uity rm and the story may differ
the salary is igger, ut the work hours are longer. maller private e uity players still re uire their staff
to work to hours a week. till, they dont compare to the hours put in y investment ankers.

Investment ankers are known for working extremely long hoursaround to per week on
average or a out hours per day during a six day workweek and hours per day during a seven
day workweek . ome industry participants admit to working in the of ce all weekend and sleeping
under their desks two or three nights a week. raduates often look to work in the investment anking
industry for as short a time as possi le, so they can retire early or move on to something they en oy
more. any see investment anking as a stepping stone to working in private e uity or a hedge fund.
ecause of the long hours and stressful nature of the o , attrition rates are high and urnout is not
uncommon.

Insiders argue a out whether investment anking is more social than investment management,
despite the latters shorter workweeks. s an investment anker you usually have a group of other
analysts or associates working alongside you. oure also enduring those gruelling hours together,
which can lead to a certain sense of camaraderie. When there is downtime, I ankers often use it
to uild relationships that lead to social interaction outside of work. In investment management, you
might e the only associate. rivate e uity and hedge funds, in particular, tend to e smaller than
investment anks and dont re uire as many analysts and associates to do the work. articularly
at a very small rm, this means the average day can seem isolated and lonely, though investment
management analysts at the igger anks claim this isnt the case in larger workplaces.

ay
Working at a hedge fund or private e uity rm is traditionally more lucrative than investment anking,
although such rms very rarely employ university leavers. t a private e uity rm you will make
roughly as much a year as post associates at anks makesigni cantly more than youd make
as an analyst.

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edge fund pay varies widely etween funds, and many investment management companies have
trimmed pay in response to recent economic conditions. ut, as a rule of thum , the normwhich
can mean different things at different rms, these daysis around , for those coming in
directly from anking, plus a onus that will take you to around , to , , very similar
to private e uity associates. This is much more than what you could get as a third year investment
anking analyst, and is a out on par with what post associates at investment anks make.
The gap etween salaries ecomes increasingly o vious in the upper echelons. ome hedge fund
partners, al eit not representative of the industry as a whole, earn illion or illion a year, more
than the s of even the iggest investment anks.

raduates who oin asset managers straight out of university may initially take home less than their
investment anking counterparts. The average starting salary of graduates in the asset management
industry is around , , according to one manager at an investment management rm,
whereas graduates in investment anking start on a median of , to , . owever, you
move up the pay hierarchy with igger leaps at asset management rms, and often in less stressful
environments. nd its important to keep in mind that compensation and pay structure may differ from
company to company one investment management insider said that the pay and onus offered at her
rm was exactly the same as what was offered at an investment ank where shed previously worked.

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THE
s ault areer
uide touide
p
Investment
to Investment
Ban ingManagement, European Edition

Chapter
b - 1:
v .Buy-Side
s - vs. Sell-Side
Chapter
f 2:
r Investment
b Styles
k w
t
Chapter
c 3: Financial
a mResearch
g Breakdown
i v
Chapter 4: sThe Clients of Asset Managers
 s de sell s de
Chapter 1

If youve ever spoken with investment professionals, youve pro a ly heard them talk a out the uy
side and the sell side. What do these terms mean, what are the differences in the o functions
and how do the two sides interact with one another

hats the difference

The uy side refers to the asset managers who represent individual and institutional investors. The
uy side purchases investment products such as stocks, onds and derivatives on ehalf of their
clients with the goal of increasing its assets. This chapter will take a rief look at the types of o s on
each side. The rest of the ook will look at the uy side in detail. There are several different career
options on oth the sell side and uy side the guide will go through these in the following paragraphs.

In contrast, the sell side refers to the functions of an investment ank. peci cally, this includes
investment ankers, traders and research analysts. ell side professionals issue, recommend, trade
and sell securities to the investors on the uy side. The sell side can e thought of primarily as a
facilitator of uy side investments the sell side makes money not through a growth in value of the
investment, ut through fees and commissions for these facilitating services.

T I
ell side rms, such as organ and organ tanley, offer graduates the opportunity to oin
structured training programmes culminating in placements with various divisions such as investment
anking, sales and trading or e uity research. ecause of a relatively larger num er of o
assignments, the sell side employs more recent university graduates than the uy side. or instance,
many large investment anks hire annually upwards of graduated s and university graduates
to egin as ankers and research analysts. Training programmes differ across most institutions.

There are two primary career paths for recent undergraduates in a sell side rm sales and trading,
and investment anking. oth e uity and xed income research typically fall under the sales and
trading um rella, although some anks reak out the research entirely on their own.

ositions in sell-side research

The primary position for those interested in investment management on the sell side will e in either
e uity or xed income research. esearch professionals analyse company and industry statistics,
predict earnings and cash ows, determine appropriate valuations and recommend investments to
uy side clients. Typically, graduates work as unior analysts for senior industry research analysts.
Individuals hired from usiness schools, however, generally start as research analysts working directly
with the senior analyst.

ell side research associates spend the ma ority of their day gathering industry data, populating
investment models and preparing the foundations of company and industry reports. ver time, they

17
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typically garner more responsi ilities, such as attending industry events and investor presentations,
and running various nancial analyses.

ell side research associate analysts uild investment models, assist in generating investment
recommendations, write company and industry reports, and help to communicate recommendations
to uy side clients. ver time, the associate analyst may often pick up coverage of additional stocks
often small or mid cap , using the analyst as a mentor.

ositions in investment ban ing

Investment anking professionals assist companies in raising capital and exploring various nancial
alternatives. rofessionals in I anking are called analysts if they are university graduates and
associates if they are graduates. ome of the most common transactions that investment
ankers work on are initial pu lic offerings I s and company mergers and ac uisitions .
Typically, analysts and associates work etween and hours per week preparing presentations
and nancial models for anking clients. ndergraduate students have the opportunity to enter into
analyst training programmes whereas graduates have the opportunity to enter into associate
training programmes. fter training they are placed into either industry groups, such as media,
nancial services, or industrials, or into product groups, such as , e uity capital markets or de t
capital markets.

nvestment ban ing vs. investment management

s discussed earlier, there are several differences etween the two careers. The primary difference
is that investment ankers work in the primary markets, structuring and issuing various securities,
whereas investment managers work in the secondary markets, making decisions on which securities
to invest in. or more information on investment anking, please see the Vault Career Guide to
Investment Banking.

T I
uy side rms are structured in a far less formal manner than sell side rms. onse uently, career
paths are more exi le and o descriptions vary more from one rm to another. This presents the
opportunity for very intelligent and successful individuals to e promoted at a very young age. In
general, uy side rms have a three segment professional staff consisting of

ortfolio managers who invest money on ehalf of their clients

esearch analysts who provide portfolio managers with potential investment recommendations
and, in some cases, invest money in their respective sectors

ccount and product managers who manage client relationships and distri ute the investment
products to individual and institutional investors

peration staff who carry out ack of ce roles, ranging from systems developers to risk analysts

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When eginning your career on the uy side, you typically will start as an analyst, or in one of these
aforementioned four areas.

rofessional ositions in Asset anagement

s c e: de ell de
In general, investment management companies are less structured than most other types of nance
rms, including investment anks, commercial anks and accounting rms. s ndrew c inlay,
an analyst at lack ock, says, The rm is very hori ontal, theres no real strict hierarchy. s a
result, investment management positions have less de ned o descriptions than positions at other
types of nance rms. or example, investment anking typically has a three year analyst program
for university graduates, moving on to a three year associate programme or perhaps a direct role for
recruits , and then promotions to vice president and managing director. Investment management
careers have a less rigid hierarchy and there is usually no formal training programme, esides
uali cations such as the investment management certi cate I and chartered nancial analyst
award. o descriptions for similar roles in the investment management industry differ from
rm to rm, and only the largest rms in asset management have all of the positions descri ed in this
ook. That said, when interviewing, you should ask your interviewer to clarify exact o responsi ilities.
y doing so, youll not only gain insight into the position, youll also sound informed a out the lack
of structure in the industry.

ositions for university graduates

When starting out, most graduates nd themselves at the lowest rung of the ladderassociate. That
means youre typically speciali ing in one speci c area, and providing information on very speci c
areas of the nancial world. fter three or four years, associates can work their way up to an analyst
title. nce that is achieved, your work is a it roader and re uires managing money or providing
research for a wide spectrum of asset class.

t some rms, undergraduates with non usiness educational ackgrounds can start as research
assistants and work their way to an associate promotion. oth positions offer great opportunities to
learn the nuances and fundamentals of the usiness y working directly with senior analysts and
portfolio managers. nd, at some rms, research assistants and associates are given their own
e uities to cover so if youre interested in more responsi ility at the outset of your career, make sure
to nd out which rms offer this .

esearch investment analysts can cover a road range of activities and disciplines, which can vary
according to the nature of the employer. Typically, research analysts will e sorted y the type of security
e uity or xed income. ometimes they can focus on a region, such as outh frica. thers focus on
an industry, such as real estate. ormally, analysts maintain investment models, gather industry and
company information, assess risks and help devise recommendations. Investment research analysts
support senior research analysts often called associates who focus on particular areas of investment
for example, a num er of companies in an industry , rather than speci c investment funds. n analyst
often has a set of companies to research and develop in depth knowledge of, to make informed
recommendations to fund managers. These are usually in a speci c industrial sector such as retail or
utilities, or a speci c geographical area, such as urope or the ideast ulf.

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ortfolio manager assistants screen for potential investments, monitor portfolio characteristics and
assist in client relations. ortfolio manager assistants offer support to portfolio managers, who typically
oversee speci c investment funds for example, a speci c mutual fund or pension fund .

esearch assistants perform oth administrative functions as well as those duties of a research
associate. Tasks include answering the phone, scheduling meetings, listening to earnings conference
calls if the associate or analyst is too usy and data analysis. ver time, if the assistant shows aptitude
and am ition for research, more responsi ility can e thrown his her way. This can often lead to a
promotion to research analyst.

nother less travelled route for graduates is to oin a marketing and sales department as either an
account manager or a product manager.

ccount managers assist in creating portfolio review presentations, developing promotional

presentations for potential new clients and answering re uests for proposals s issued y
institutions seeking to hire new investment managers. They are also in charge of managing and
servicing existing clients, who might threaten to pull their money out. The role is traditionally more
sales and marketing than investing, and involves a lot of wining and dining the potential clients on the
company card. s the saying goes, its a hard life! They also meet investment consultants and play a
role in developing new products.

roduct managers serve as liaison etween the portfolio manager, account manager and client. They
typically have greater in depth knowledge of the particular products i.e., stock mutual fund strategy
and investment focus. roduct associates often seek new assets to put into their fund and have a
strong understanding of oth the funds investment performance and external markets.

ccount and product management has ecome increasingly critical in the investment management
industry. This path is an outstanding alternative for those interested in the industry, ut not driven y
investing money.

nother increasingly common route for graduates to get into the industry is operations. perational
staff do everything from working in IT to settling and reporting trades, pro ect management and
customer service. ront of ce operational staff are often usiness minded and knowledgea le
a out nancial markets. ack of ce staff can e more technically gifted ut less usiness savvy. s
regulations have recently tightened, graduates are hired more often in risk and compliance divisions as
mem ers of the operations teams. o s in operational departments, such as risk, can e uite similar
to an investment analyst position in terms of research and report writing. In a risk team, however, there
will pro a ly e more num er crunching.

isk analysts are responsi le for ensuring fund managers know what their exposure and risk is in
various areas. They monitor the trade managers that are making and any news events that could
affect these trades. signi cant part of the o is crunching num ers and feeding them ack to fund
managers.

ystems developers carry out a wide range of tasks depending on the department in which they
work. Those in ack of ce positions can e responsi le for the performance and maintenance
of one or more computer systems. In igger rms, each developer will usually e assigned one
system. evelopers in innovation and architecture groups will normally e responsi le for isolating

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and investigating new technologies that may aid usiness. They will pitch these technologies to their
clients, normally within the company, who will decide whether or not they will e adopted.

usiness analysts facilitate interaction etween the front of ce usiness staff and ack of ce
technical staff. ften from an IT ackground, they will e responsi le for nding new systems and
monitoring and maintaining existing system performance. They will also make process changes as
re uired. The role re uires a great deal of liaising with other departments to keep up to date. In the
words of one usiness analyst, the role is to uild a ridge etween the usiness and technology
side of a rm. ou can relate to the techies and their argon and at the same time, translate it into
understanda le language for the usiness side.

ositions for A graduates

ecent graduates or working professionals with considera le investment experience typically
enter the industry as investment research analysts. They are usually assigned a small industry to
cover, giving them an opportunity to get their feet wet.

esearch portfolio analysts provide insight and investment recommendations to portfolio managers.
The typical day includes listening to company management conference calls, attending industry
conferences, uilding investment models, developing industry trends and enchmarking a companys
progress to its peers.

uccess as a research analyst will lead to advancement to larger industries and ultimately to the role
of portfolio manager a large percentage of portfolio managers traverse through the ranks as research
analysts .

hat are the differences between buy-side and sell-side obs

n the surface, the roles of uy side and sell side analysts sound remarka ly similar. owever, the
day to day o s are uite different. ell side analysts not only generate investment recommendations,
they also need to market their ideas. This involves pu lishing ela orate and lengthy investment
reports and meeting with their uy side clients. In contrast, the uy side analyst focuses entirely on
investment analysis. lso, the uy side analyst works directly with portfolio managers at the same rm,
making it easier to focus on the relevant components of the analysis. The sell side analyst is writing
not for a speci c team of professionals, ut for the uy side industry as a whole.

espite these differences in responsi ilities, professionals in oth positions develop similar skill sets.
In fact, sell side research and investment anking positions are the most popular training grounds for
nance professionals who eventually switch to the uy side.

ow do the buy-side and sell-side interact

ell side rms earn a trading fee every time securities onds or stocks are ought or sold in a
uy side rms portfolio. ecause portfolio trades can generate si ea le commissions, sell side
rms investment anks have an incentive to develop relationships with asset managers. Through
institutional salespeople, investment anks provide asset managers with services such as analyst
recommendations and access to rm sponsored I s and de t offerings.

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TI
In general, compensation in asset management is a com ination of ase salary and onus. s you
move up in the organisation to senior portfolio manager or senior account and product management
of cial, your pay ecomes more heavily weighted toward onuses. enior portfolio manager pay is
somewhat contingent upon relative investment fund performance, si e of the fund managed, new
assets invested in the fund and overall rm performance. enior account and product management
compensation is weighted toward new account generation and the attrition level of existing accounts.

The typical starting salary for entry level graduates in research positions is around , in ondon
and din urgh with onuses of per cent, depending on economic factors. ase salaries are
slightly less in the rest of urope and the . fter ve to eight years salaries can rise to as high as
, with onuses of per cent, again depending on circumstances onuses of to
per cent are possi le, ut they may e lower if the rm has not fared well. Typical salaries at senior
levels can e approximately , to , with onuses of to per cent. roduct and
account managers usually earn slightly less than their research counterparts. owever, marketers in
some funds can receive a onus of per cent on the fees earned for the money they ring in. This
means massive onuses, on the verge of million, are distinctly possi le at top performing funds.
ven those who start in ack of ce operational positions can earn around , a year if ased
in ondon.

side from o title, there are two other factors that have a ma or impact on the amount and type of
compensation received. irst factor is the type of asset management rmtraditional or alternative
etail funds offer steady compensation and o security, whereas hedge funds offer the potential for
high compensation with minimal o security and, these days, the risk of pay restrictions imposed y
nancial authorities . econd factor is the structure of the asset management rmpu lic or private
u lic retail funds and hedge funds can offer employees stock options or restricted stock. any asset
management rms are private, so they can offer their senior personnel direct e uity interests in their
companies. This can e highly lucrative, as many rms pay out a signi cant portion of their annual
earnings to their e uity partners.

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Chapter 2

Investment style is often a loosely used term in the industry and is a reference to how a portfolio is
managed. These styles are typically classi ed in one of three ways

The type of security i.e., stocks vs. onds

The risk characteristics of the investments i.e., growth vs. value stock or Treasury vs. unk
onds
The manner in which the portfolio is constructed i.e., active vs. passive funds

It is important to note that all of these styles are relevant to the different client types covered in the
previous chapter mutual fund, institutional and high net worth investing .

T IV IV I I TI
ver the last years the industry has een forced to mature y the desires of its client ase. s
investors have ecome increasingly sophisticated they have tapped multiple investment styles to
diversify their wealth.

Typically, investors whether individual or institutional allocate various portions of their assets to
different investment styles. ather than focus all their assets on one asset class, or one investment
style, investors spread their investments over a variety of products and classes. The style of a
portfolio, such as a mutual fund, is clearly indicated through its name and marketing materials so
investors know what to expect from it. dherence to the styles marketed is more heavily scrutinised
y institutional and pension fund customers than y mutual fund customers. Institutional investors
monitor their funds every day to make sure that the asset manager is investing as they said they
would. Imagine the overall wealth of an individual or institution as a pie. Think of each slice as
investing in a different portfolio of securities this is whats called diversi cation. In the following
pages, we will descri e each investment style classi cation.

T IT
Type of security is the most straightforward category of investment style. or the most part, portfolios
invest in either e uity or de t. ome funds ena le portfolio managers to invest in oth, whereas other
funds focus on other types of securities, such as converti le onds. or the purpose of this analysis,
we will focus on straightforward stocks and onds.

toc s
uity portfolios invest in the stock of pu lic companies. This means the portfolios are purchasing a
share of the companythey are actually ecoming owners of the company and, as a result, directly
ene t if it performs well. uity investors may reap these ene ts in the form of dividends the
distri ution of pro ts to shareholders , or simply through an increase in share price.

23
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onds
ixed income portfolios invest in onds, a different type of security than stocks. onds can e
thought of as loans issued y such organisations as companies or municipalities they are often
referred to as de t. ike loans, onds have a xed term of existence and pay a xed rate of return. or
example, a company may issue a ve year ond that pays a per cent annual return. This company
is then under a contractual o ligation to pay this interest amount to ondholders, as well as return
the original amount at the end of the term. lthough ondholders arent owners of the ond issuer
in the same way that e uity shareholders are, they maintain a claim on its assets as creditors. If a
company cannot pay its ond o ligations, ondholders may take control of its assets in the same
way that a ank can repossess your car if you dont make your payments . enders further up the
capital structure normally nd it easier to redeem assets of the company. Institutions such as anks
will normally e reim ursed efore individual ond holders.

lthough onds have xed rates of return, their actual prices uctuate in the securities market ust
as stock prices do. ust as there is a stock market where investors uy and sell stocks, there is a
ond market where investors uy and sell onds. In the case of onds, investors are willing to pay
more or less for de t depending on how likely they think it is that the ond issuer will e a le to pay
its o ligations.

erivatives
In recent years derivatives have ecome a ma or part of the uropean asset management industry.
a or asset management rms have implemented systems to ena le the widespread use of
derivatives as an investment and risk management tool. imply put, a derivative is any nancial
instrument whose payoffs are derived from the value of an underlying varia le at a time in the
futurehence the name. Types of derivatives include options, warrants and futures. tock and
index options are widely used y professional investors to hedge their share portfolios. Index options
allow investors to gain wider exposure to the market rather than ust single securities. erivatives are
also a risk management tool depending on how they are used and how leveraged they are, they can
either increase or reduce the risk of an investment. The derivatives market received a lot of attention
in , most of it negative. The government was forced to spend illion ailing out glo al
insurance giant merican International roup I , which was crippled y losses on credit default
swaps s , a type of derivative.

I T I TI I V T T
ypes of stoc s and their ris pro les
ost e uity portfolios are classi ed in two ways

y si e, or market capitalisation, of the companies whose stocks are invested in y the portfolios
y risk pro le or valuation of the stocks

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M ke c l ono n e en
The market capitalisation also known as market cap of a company refers to the companys total
value according to the stock market. It is the product of the companys current stock price and the
num er of shares outstanding. or example, a company with a stock price of and million
outstanding shares has a market cap of million.

ompanies and their stocks are usually categorised as small , mid or large capitalisation. ost
e uity portfolios focus on one type, ut some invest across market capitalisation. xamples of large
cap companies can e found on the T index, whereas indices such as the T mall ap
Index or the oare ovett maller ompanies Index list the small caps.

Whereas there is no real answer and de nitions vary, small capitalisation typically means any company
worth less than illion. id caps usually have a market value in the million to illion
range, whereas large caps can e valued anywhere from illion upwards. s would e expected,
large capitalisation stocks primarily constitute well esta lished companies with long standing track
records. lthough this is generally true, the tremendous growth of new technology companies over
the past decade has propelled many edgling companies into the ranks of large capitalisation. or
instance, oogle has a market capitalisation of around illion and is one of the largest companies
in the world. In the same way, small and medium capitalisation stocks not only include new or under
recognised companies, ut also sometimes include esta lished rms that have struggled recently
and have seen their market caps fall. ecently, fund investing in new capitalisation categories has
emerged for example, the micro cap under million and mega cap over illion funds,
each with the stated o ective of investing in very small or very large companies.

r k o le : l e ow n e n
uity portfolios invest in either value or growth stocks. These terms are also tied in with expected
risk a growth stock can provide higher returns and more risk. There are many ways that investors
de ne these styles, ut most explanations focus on valuation. Value stocks can e characterised as
relatively well esta lished, high dividend paying companies with low price to earnings and price to
ook ratios. ssentially, they are diamonds in the rough that typically have undervalued assets and
earnings potential.

rowth stocks or glamour stocks have the potential to expand at rates that exceed their respective
industries or market. These companies have a ove average revenue and earnings growth and their
stocks trade at high price to earnings and price to ook ratios. Technology companies such as
oogle and pple are good examples of traditional growth stocks.

any variations of growth and value portfolios exist in the marketplace today. or instance, aggressive
growth portfolios invest in companies that are growing rapidly through innovation or new industry
developments. These investments are relatively speculative and offer higher returns with higher risk.
any iotechnology companies and new internet stocks in the late s would have een classi ed
as aggressive growth. nother classi cation is a core stock portfolio, which is a middle ground that
lends investment in oth growth and value stocks.

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utting it together
There are many com inations of si e and style variations and e ually as many portfolios and investment
products. or example, you have your choice of investing in small cap growth stock portfolios, mid
cap value stock portfolios or large cap core stock portfolios. r you can invest in small cap value
stock portfolios, mid cap growth stock portfolios, and so on.

Investors often refer to the nine oxes of investment styles to categorise different portfolios. utual
fund rating agencies usually categorise funds y this diagram. or example, a large cap value fund
would primarily invest in companies with capitalisations around illion and ratios that are
elow the market average. xamples of each type of strategy along with the ticker sym ol are listed
in the oxes.

T e o in e en s e e

Value Blend Growth

odge and Longleaf Growth Fund

Large Co Stoc artner of America
( G (LL F (AGTH
Capitalization

anu Mid Fidelit Low T owe rice

Mid Cap Value riced Stoc Mid Cap
( MCV (FL S Growth SHS
( MG

Goldman Morgan A M Small

Small Sach Small Small Cap Cap Growth
Cap Value Core Select (GTSA
(GSSM (VSSC

We should note that the nine oxes are only a very generic way of categorising funds. etail funds have
created many different strategies over the years, which means categorising them is very dif cult. We
ust riey discussed the aggressive growth style, ut another example would e the style
growth at a reasona le price .

In general, the smaller the company small cap stocks , the riskier its stock is considered. This is
ecause large companies are usually older and etter esta lished, so its easier to make predictions

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as they have more historical nancial data from which analysts can ase predictions. owever, with
higher risk comes the potential for higher returns, so many investors dont mind putting their money in
small caps. ometimes this strategy pays off in small caps in the outperformed large caps
for the fth consecutive year, according to the oare ovett maller ompanies Index. ut
small caps were especially vulnera le to the economic woes of , and fell to historic lows. or full
year the gave returns of . per cent, . percentage points elow the T ll hare.
ore recently, small caps have een outperforming large caps once again. In , the umis maller
ompanies Index the new name of the put up a total return of per cent, while the T ll
hare had a return of per cent.

rowth stocks are also considered riskier, as investments in those stocks are ets on continued rapid
growth reected in the high price to earnings ratio of these stocks . The iggest risk in investing in
these stocks is the potential decline in the rate of revenue or earnings growth. If investors ecome
worried that growth in one of these stocks will slow, it is not uncommon to see the stock drop y
per cent or more in one day.

T T I I I
ust like stock portfolios, xed income ond portfolios vary in their focus. There are various types
of onds. The most common way to classify them is as follows

overnment and supranational onds

Investment grade corporate onds
igh yield corporate onds
earlings

overnment ond portfolios invest in the de t issues from national treasuries or other government
agencies. These investments tend to have low risk and low returns ecause of the nancial sta ility
of national governments. In the , onds are also known as gilts this comes from the onds eing
very low risk, or gilt edged. upranational onds are issued y institutions such as the uropean
Investment ank I and the World ank. s with government onds, they have very low risk.

Investment grade corporate ond portfolios invest in the de t issued y companies with high credit
standings. These credit ratings are issued y rating companies like tandard oors. They rate de t
ased on the likelihood that a company will meet the interest o ligations of the de t. The returns and
risks of these investments vary along this rating spectrum. any corporate ond portfolios invest in
company de t that ranges the entire continuum of high grade de t.

In contrast to investment grade de t, high yield corporate de t, also called unk onds, is the de t
issued y smaller, unproven, or high risk companies. onse uently, the risk and expected rates of
return are higher. unk, or high yield, is de ned as a ond with a tandard oors ratings elow
.

earlings invest in the de t issued y local authorities and agencies, such as pu lic school systems.
The favoura le tax treatment on these types of investments makes them a favourite of tax sensitive
investors. ields also tend to e higher than for central government onds as the risk is considered
greater.

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ther types of onds include index linked onds. The capital redemption of this type of ond is linked
to the rate of ination. s a result, index linked onds are more popular in times of high ination.
onverti le onds are also uite popular with investors. These onds can e exchanged for shares
or other securities, usually with the company that issued the ond.

Investment managers also manage ond portfolios that mix together the different types of onds.
Indeed, hy rids of all kinds exist. Typically, though, if you have a lot of money, a etter way to diversify
is to invest in a fund made up of one type of ond. If, for example, youve got million to invest,
youre likely to give million to the est yearling fund manager, million to the est corporate
ond fund manager, etc., rather than invest all million in a hy rid.

nvestment decisions
ust as with e uity portfolios, there are a myriad of xed income portfolio types. lthough the ratings
issued y agencies like oodys and tandard oors provide investment managers with a guideline
and starting point for determining the risk of a ond, managers also form independent opinions on
risk, and make investment decisions ased on whether they feel they have a good chance of receiving
the promised payments.

The easiest way to see this is to consider a unk ond. When a high risk company as measured
y its credit rating issues onds, it must promise a high rate of return to compensate investors for
their increased risk. n individual asset manager, however, through analysis of the company and its
industry, may elieve that the company has a good chance of performing well. The manager would
likely then decide that the companys de t is a good investment.

Additional categories
sset management rms also organise and market funds in categories that we have not discussed.
irms also market funds ased on industries health care stock funds and even politics, such as rms
with strong corporate responsi ility records or environmentally friendly funds.

ecent developments
ecause of the proliferation of alternative investment products such as hedge funds and private
e uity , traditional asset managers have started to compete with these new styles. ost retail funds
are governed y their speci c mandates, which often preclude the manager from shorting stocks
or etting they will decline in value . owever, several traditional asset managers have created
traditional mutual fund products that ena le the portfolio manager to short stocks. The one thing
to note a out these funds is that although the mandate provides the a ility to short sell, the fund is
under no o ligation to do so. ne analyst working for a long short product stated, we havent een
short a stock in over a year.

erhaps the most recent development is the advent of the funds. This type of mandate
stipulates that the portfolio must e per cent short and use those orrowed funds to purchase
an additional per cent of stocks, making the long position per cent.

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ome fund managers have launched active high alpha funds that aim to outperform the market
without resorting to hedge funds risky tactics. When it works, it works for example, chroders
lpha lus fund, launched in uly , grew over per cent y arch and eat index
returns in , and . ike many funds, however, lpha lus took a eating in ,
posting . per cent returns. ince then, the fund has risen signi cantly. ver the ve year period
ending ay , , it rose nearly per cent.

V . T TI T
sset managers used to claim all returns were down to them. ut indexes have changed that. und
managers should always e outperforming indexes. eta is, simply, the amount of return that can e
explained y factors such as rising indexes or strong economic growth. The alpha, which all managers
search for, is the it of return that cannot e attri uted to outside factors. In essence, fund managers
see the alpha as their rilliance. anagers in traditionally higher risk funds, such as hedge funds,
claim to always o tain the alpha. The search for the alpha returns has led to the exotic eta, of
which there are two types. ne exotic eta refers to investment in exotic assets such as shipping
freight, wine and even foot allers using normal strategies. nother is applying exotic strategies to
normal securities with new trading styles to nd new ar itrages in traditional markets.

e ned contribution vs. de ned bene t

Theres also the de ate over how uropeans plan for retirement. eyond ust playing the markets to
make some money, investors planning for the long term are confronted with some tough choices
relying on pensions versus a more hands on approach. Theres een a sharp rise in retirement costs
as life expectancy continues to rise. osts and ene ts for retirees were once calculated y us not
living much past the average retirement age of . dvances in medicine, and health awareness,
means those in the uro one are living much past their life expectancy. nd thats left investment
management rms with a new niche, and companies in a uandary a out how to dole out pensions.

Investment management rms are now catering to workers a out how to take care of their retirement.
mployers once relied on de ned ene ts to determine how much workers were paid in retirement,
and that was determined y years of service calculated y salary. That has proven insuf cient. ow,
employers are encouraging workers to take on more responsi ility for managing their own retirement.

or instance, an employer that used to contri ute per cent of a workers salary into a traditional
de ned ene t plan might instead put per cent into a de ned contri ution plan. t
the same time, they might throw in a salary increase that could e put into the plan. The net
effect the workers pension contri ution increases from per cent of salary to per cent. s a
result, employees egan shopping for investment management rms with strong retirement plans.
The end ot uite.

The glo al recession proved devastating to pension plans as markets swooned and portfolios lost
value. Whats more, workers facing layoffs or reduced work hours cut ack on pension savings and
plan contri utions according to a survey y the ension, a ma or private pension provider, one in
workers cut ack on contri utions or halted them completely etween and . ll told,

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pension savings in the fell per cent in and lump sum pension investments dropped y
per cent. any workers are simply concentrating on surviving the downturn rather than making
long term commitments, owland inancial adviser raeme itchell told cottish newspaper The
Herald in . nd any spare cash they have got is eing used to reduce de ts on credit cards, and
mortgages, etc. n top of that there is a general disenchantment with pensions which is not always
usti ed ut completely understanda le.

In order to restore savings, the government unveiled a plan, which took effect in cto er ,
that automatically enrolls employees in so called ersonal ccounts. nder this scheme, per
cent of employee salaries will e deducted from their payche ues and contri uted to the account,
and employers will have to contri ute another per cent. Tax reaks will result in another per cent
of salary that can e invested in the accounts, which will in turn e invested in various investment
funds.

I TI
r k n eecono
inancial risk can never e eliminated completely, so much of an investment managers o focusses
on measuring, monitoring and minimising it. roadly speaking, there are two types of economic
risk that can impact an investment managers work systemic risks and speci c risks. The former
are threats to the entire nancial system or large chunks of it the latter are market risks that affect
individual portfolios or individual assets in portfolios. peci c risks include capital risk, which is the
loss of the initial investment, and currency risk, which is a loss precipitated y exchange rate swings.
ritish investors who held lots of dollar denominated assets, for instance, lost portfolio value when
the dollar declined in . egal risk and compliance risk may not seem like nancial concerns at
rst, ut theyre still risks that can damage asset valuepicture a company whose stock plummets
ecause the is arrested for reaking the law.

o matter how conscientious investment managers are, however, they cannot protect portfolios from
systemic risk. or the most part, its up to central anks and governments to guard the nancial
system against collapse, a task that has ecome increasingly complicated. ystemic pro lems
can cause widespread damage through a domino effect, as one nancial institutions woes trigger
a catastrophe for other others halfway around the glo e, touching off waves of investor panic.
ystemic risks rise as nancial institutions ecome more interconnected and as they ecome more
highly leveraged.

The su prime mortgage crisis offers a recent example of systemic risks. When the housing u le
urst and people egan defaulting on their home loans, mortgages and mortgage acked securities
especially those uilt on su prime mortgages shed value, leaving many overleveraged institutions
without the capacity to cover their losses. omplex instruments like credit default swaps that were
intended to protect anks from the risk of creditors defaulting actually compounded the pro lem, as
institutions that were supposed to pay this insurance lacked resources to do so. This phenomenon,
known as counterparty risk, meant that everyone holding such contracts feared that the party on the
other side of the contract might e on the verge of default. The result lo al panic, fro en credit
markets, loss of li uidity and, ultimately, pricey ailout plans.

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ow investment managers handle ris

asic principle of investing states that the higher the potential return, the greater the potential risk
involved, hence the safety and relatively low rates of return that characterise government onds. or
investment managers, the rst step is to identify clients goals growth or value, for example and
their risk tolerance. n elderly pensioner looking for consistent income will have one type of risk
pro le, a hotshot media mogul who en oys a gam le will have another. Its important to note that
investors, on the whole, ecame dramatically more risk averse in and . The markets poor
performance chipped away at portfolio values, and a steady stream of ad economic news fuelled
investor pessimism. f course, down markets mean opportunities for those willing to take them.

nce investment managers understand their clients goals and risk preferences, they must analyse
the risks in their portfolios. ne of the most commonly used risk metrics is Value at isk Va , which
uses statistics and pro a ility data to uantify the likelihood of losses over a speci ed time period.
sset managers, ankers and risk managers have come to appreciate Va ecause it can e applied
to many different types of assets, and ecause its results can e aggregated to provide a snapshot of
risk throughout an entire rm. isk control doesnt end with the manager client relationship, however.
Investment management professionals must also understand the regulatory frameworks that govern
their usiness and comply with regulators re uirements.

he A and uropean ris regulation

Investment management rms in the are regulated y the inancial ervices uthority ,
which oversees more than , nancial services companies and provides guidance for risk
management. The s responsi ilities have grown since its creation in in it was
granted authority to regulate mortgage companies, and in it was given oversight of the insurance
industry. ne of the s goals is to manage and moderate risk in the system. To do so, it watches
rms for regulatory compliance and measures risk in two ways impact how ad would it e if irm
collapsed and pro a ility what are the odds of irm collapsing . irms that present higher
risks to the system receive greater scrutiny. In order to determine how much risk any one rm might
involve, the applies a framework known as W the dvanced isk esponsive perating
frameWork wouldnt e as memora le . The W framework was overhauled in ,
so now the uses an improved version du ed W II.

The employs relationship managers and supervisory teams who are responsi le for the actual
work of risk assessment checking to make sure rms le re uired noti cations, poring over nancial
disclosures and investigating any irregularities. or medium to high risk rms, the will issue
customi ed risk mitigation guidelines. In the case of high risk rms, investigators go even further,
making regular site visits and scheduling meetings with senior management. mall rms and those
deemed low risk typically do not re uire a risk mitigation plan from the . They simply su mit
necessary disclosures and nancial data, all of which is analysed y experts. If warning ags
arise in a speci c rm, group of rms or industry, the will organise a more thorough investigation.

ntil recently, uropes risk regulation was left in the hands of individual nations, and different countries
took different approaches to identifying, monitoring and addressing risks in their nancial systems. The
rise of the uropean nion rought calls for a uni ed, pan uropean risk management system, something

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the in an effort to protect the s authoritycontested. ut the glo al nancial crisis added a
sense of urgency to these discussions, so in summer the uropean ommission announced it
would overhaul the s nancial sector y esta lishing a ondon ased uropean anking uthority, as
well as a uropean ecurities uthority in aris and a uropean Insurance uthority in rankfurt. These
plans were nalised in late , ut the won one compromise the new regulators will not e a le to
interfere with mem er nations scal sovereignty.

T I T TI
ll portfolios, whether stocks or onds, are compared to enchmarks to gauge their performance
indices or peer group statistics are used to monitor each funds success. tandard indices for e uity
portfolios include the T and ll hare Index. or onds, popular enchmarks include the
ilts ear. These indices are composed of representative stocks or onds. They function as
a general arometer for the performance of a particular portion of the market they are designed to
measure.

s composites, the indices can e thought of as similar to polls a polling rm that seeks to understand
what a certain population thinks a out an issue will ask representatives of that cross section of the
population. imilarly, a stock or ond enchmark that seeks to measure a certain portion of the
market will simply compile the values of representative stocks or onds.

ortfolio construction refers to the manner in which securities are selected and then weighted in
the overall mix of the portfolio with respect to these indices. ortfolio construction is a fairly recent
phenomenon, and has een driven y the advent of modern portfolio theory T.

assive investors or inde trac ers

assive funds, also called index trackers, have een around for a out years. They select a portfolio
of assets whose value will track that of a nancial index. Investors in index trackers are classi ed as
passive investors, and investment managers who manage index funds are often called indexers.
These funds are continually tinkered with to ensure that they match the performance of the index.
or e uities, the T is the enchmark that is most commonly indexed.

Active investors
ctive funds uy and sell nancial products in an attempt to outperform the rest of the market. They
rely on research, forecasts and udgment to decide what securities to uy, hold and sell.

ctive portfolios adhere to their own investment discipline and investment managers invest in what
they think are the est stocks or onds. They are then compared, for performance purposes only, to
the preselected index that est represents their style. or instance, many large capitalisation active
value portfolios are compared to the T . It is important to note that although active portfolios
are still compared to indices, they are not designed speci cally to mimic these indices. This is ust
to assess their performance.

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Alternative methods
Variations of active and passive portfolios are present throughout the marketplace. There are
enhanced index funds that closely examine the enchmark efore making an investment. These
portfolios mimic the overall characteristics of the enchmark and make small ets that differentiate
the portfolio from its index. nother type of popular portfolio construction method is sector investing.
This is essentially a portfolio that is comprised of companies that operate in the same industry.
ommon sector portfolios include technology, health care, iotechnology and nancial services.

v on o ac e ndp epo ol o

Risk

International

S Acti e Equity:
E uit All Global
Emerging Markets
S Passi e Small-Cap alue Pacific Basin
E uit Small-Cap Core Europe
Balance E uit Small-Cap Gro th Small-Cap
Small-Cap Core
i e Income Mi -Cap alue Large-Cap
Mi -Cap Core
Mi -Cap Core
Global Balance Large-Cap alue
S i e Income Mi -Cap Gro th
S All Asset Large-Cap Core Fixed Income:
Large-Cap alue All Global
Classes Large-Cap Gro th
High iel Large-Cap Core Emerging Markets
Market eutral
Con ertibles Large-Cap Gro th High iel
Enhance In e
Core
In e eutral
Interme iate
Stable alue
Enhance Cash

Return Potential

WI T I V TT
If you are eginning your o search in the investment management industry, you need to egin
thinking a out what investment styles strike you as most interesting. lthough many of the styles
overlap, and eing overly speci c might limit you, understanding the differences can help in targeting
companies you want to work for.

ont e concerned that your choice of employer will pigeonhole you. Whereas you should try to nd
a position with a rm whose investment style most interests you, you can always switch gears into a
different investment style after you have some experience. Initially, it is est to e in an environment
where you can learn a out investing in general.

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owever, when you target your career search, you should e informed of the rms particular
investment style. lthough large asset managers invest across a multitude of styles, other rms may
only specialise in one style. It is always important to have knowledge of these nuances. This will
de nitely ene t you during interviews, ecause passion and knowledge a out the industry always
wins valua le points with recruiters.

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f n nc lr e e c e kdown
Chapter 3

p until now this uide has discussed research as one of the primary entry points into the asset
management industry. What exactly is research and what are the different types ow does it differ
if you are working for a traditional or alternative asset manager This chapter will provide several
distinctions etween types of research, reaking it down y style, capital structure and rm. Whereas
the focus of the guide will e on fundamental e uity and xed income de t research, it will also
discuss other types of research as well as the functional roles analysts play at different types of rms.

T
Thus far we have mostly referred to fundamental researchthe analysis of a company, nancial
statements and company and industry trends to predict stock movement. owever, there are several
other types of research that asset managers conduct across many different types of products. These
include uantitative research and technical research.

undamental research
undamental research takes a dive into a companys nancial statement as well as industry trends to
extrapolate investment decisions. There is no clear cut way to conduct fundamental research ut it
normally includes uilding detailed nancial models that pro ect items such as revenue, earnings, cash
ow and de t alance. ome asset managers may focus solely on earnings growth, whereas others may
focus on returns on invested capital I . It is important for the candidate to understand the rms
investment philosophy. This can usually e achieved y doing research on the companys we site. It
is important to note that although some rms have clear cut investment philosophies, others may not.

side from uilding a nancial model, the fundamental research analyst will read through company
lings, talk to company management and sell side analysts and visit company facilities to get
a complete perspective of the potential investment. ow analysts go a out this often differ. ome
researchers feel comforta le with only the resources at their desktheir computer, internet and
phonewhereas others refuse to make investment decisions without face to face management
meetings and visiting the manufacturing facilities.

undamental analysts will also conduct industry research and determine how each company will
gain or lose from their ndings. or example, a fundamental analyst covering the defence industry
will want to make pro ections on how fast the defence udget may grow. uestions the analyst
may ask himself or herself are at what rate should I expect the defence udget to grow Is the
a solute level of spending sustaina le Which companies should ene t from the growth Will it e
companies that make ghter planes or companies that make aircraft carriers that ene t

uantitative research
uantitative research is uilt on algorithms and statistical models that seek to extrapolate value
from various market discrepancies or inef ciencies. The key difference etween fundamental and
uantitative research is where the analyst puts in the work. The ma ority of work for a uantitative
analyst rests within choosing the parameters, inputs and screens for the computer generated model.

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These models can take on a multitude of forms. or example, a simple model that seeks to take
advantage of price discrepancies in the T may split the stocks etween those that are
undervalued, as determined y a low price to ook multiple, from those that are overvalued, as
determined y a high price to ook multiple. The uantitative analyst would uild a model that would
screen for these parameters and would uy or go long the undervalued stocks and simultaneously
sell or short the overvalued stocks. In reality, uantitative models are more complex than this and
often screen for thousands of securities across a multitude of exchanges. Therefore, it is no surprise
that those who work in this eld often have h s in su ects such as maths and physics.

echnical research
Technical research is the practice of using charts and technical indicators to predict future prices.
Technical indicators include price, volume and moving averages. Technical analysts are sometimes
known as chartists ecause they study the patterns in technical indicator charts to detect future price
movements. ver time technical analysts try to identify patterns and discrepancies in these charts and
use this knowledge to place trades. Whereas fundamental analysts elieve the underlying fundamentals
revenue, earnings or cash ow of a company can predict future stock prices, technical analysts elieve
technical indicators can predict future stock prices. The skill set for technical research is very different
from that of fundamental research. ome technical analysts rely solely on their eyes to spot trading
opportunities, whereas others use complex mathematical indicators to identify market im alances.

IT T T IT V . I I
cross the uy side and sell side, fundamental analysts often focus on either e uities or xed income
de t . What are the differences etween a fundamental e uity and xed income investor The
differences primarily lie within the fundamental nancial analysis and readth of coverage.

undamentals affect e uity prices and ond prices in similar fashions. If a company is generating
strong revenue and earnings growth, improving its alance sheet and gaining market share in its
industry, oth its stock and ond prices will likely increase over time. ost e uity analysts and stock
investors are focussed on net income per share or earnings per share , as this represents the
amount a company earns and has availa le per share of common stock. nother factor that concerns
e uity investors is how management deploys its excess cash. nalysts are constantly looking for
earnings accretion, or the a ility to increase earnings per share. If company management uses excess
cash to make smart ac uisitions or repurchase its own stock, e uity investors are generally pleased
as the transaction increases .

or xed income analysts and ond investors, the emphasis is not necessarily on earnings ut more
so on earnings efore interest and taxes or IT. ond holders are primarily focused on receiving
interest payments and the return of principal. Therefore, they often follow the income statement up until
the point where interest is paid. nother key focus for xed income investors is the amount of de t or
leverage a company has on its alance sheet. ecause de t holders have claim to a rms assets, the
more de t there is, the less of a claim each de t holder may have on a given amount of assets. ixed
income analysts and investors are often focussed on two metricsthe leverage ratio de t IT and
interest coverage ratio IT interest expense . IT stands for earnings efore interest and taxes
depreciation and amortisation it is generally used as a proxy for cash ow. ixed income analysts like

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a decreasing leverage ratio as it signi es less de t on the alance sheet and a greater a ility to repay
it, and they also like an increasing interest coverage ratio as it signi es the greater a ility to service the
outstanding de t.

readth of coverage refers to the amount of companies and securities an analyst covers. ost
companies usually issue only one type of e uity security ut could have several pieces of de t
outstanding. The xed income analyst usually would cover all of these de t instruments, each of
which may have separate and distinct provisions that could alter their individual performances.
dditionally, a company may have converti le onds that can e exchanged for e uity, which the
xed income analyst would typically cover.

ell side e uity analysts typically cover etween to stocks and are expected to know even
the most minutiae of details a out each company. uy side e uity analysts typically follow to
companies. If a uy side analyst makes a si a le investment in a certain stock, they are expected to
know ust as much, if not more, detail than their sell side counterpart.

lthough coverage for e uity analysts is typically roken down into industry su sectors for example,
airlines would e a su sector of the transportation industry , xed income analysts often cover the
entire industry which could e over companies . o, whereas there can e several e uity
analysts covering the transportation industry, there may only e one xed income analyst. e t
markets are often less li uid than e uity markets and do not trade on small pieces of information.
Therefore, the xed income analyst does not need to know as much detail a out each particular
company. owever, should a uy side xed income analyst make a si a le investment in a company,
it would not e surprising for them to know as much detail as an e uity analyst.

T ITI V . T TIV
T
lthough fundamental analysts generally perform the same function regardless of the type of rm, the
role can e slightly different and mainly driven y the investment time hori on.

Traditional asset managers often hire analysts and put them in charge of ecoming experts in
certain industries. chieving this status takes years of diligent research and the traditional asset
managers are often patient with their analysts as they uild up their industry knowledge. The research
process for a particular company could take months efore an investment is made. owever, as oth
analysts and clients are typically long term investors, they are very patient and often will wait years to
capitalise on certain themes.

lternative asset managers typically have a shorter time hori on as their clients depend on positive
returns every year. They often do not have the luxury of waiting several years for investments to pay
off as do traditional asset managers. Therefore, analysts at hedge funds often have to act uickly
and decisively. They are not always categorised y industry ut may cover several industries and
are then referred to as generalists . ometimes a portfolio manager at a hedge fund may tell his
analyst to research a particular industry in the morning and get ack to him with the est investments
y the afternoon. The day is often intense. ne hedge fund analyst remarked, I spent the early
morning looking at airline stocks, the afternoon looking at retail stocks and nished the day looking
at credit card processors.

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T e l en o a e M n e
Chapter 4

s you can see from our initial discussion, the structure of the asset management industry can seem
a it complicated. ont worrythe next two chapters will explain how uy side rms operate so you
can easily understand how they t together.

peci cally, well discuss

. The clients that investment management rms serve

. The investment styles used y these rms

rmed with this knowledge, youll e ready to organise your career search in a targeted and effective
manner.

ifferent types of clients

Typically, asset management rms are categorised according to the kind of clients they serve. lients
generally fall into one of three categories mutual funds or retail , institutional investors, or
high net worth individuals. ome rms specialise in one of the three components, ut most
participate in all three. sset management rms usually assem le these three areas as distinct and
separate divisions within the company.

It is critical to understand these differences as o descriptions vary depending on the client type.
or instance, a portfolio manager for high net worth individuals has an inherently different focus
than one representing institutional clients. marketing professional working for a mutual fund has
a vastly different o than one handling pensions for an investment management rm. ater in this
guide we will discuss how positions differ across the main organising features of the industry client
types and investment styles . or now, well egin our discussion of the industry y examining
different client types.

T I
etail funds are investment vehicles for individual investors who are typically elow the status of
high net worth. etail funds are also sometimes known as the retail division of asset management
rms. They account for around a fth of the assets managed in urope. There are some interesting
differences etween the uropean and merican mutual fund markets There are over ,
mutual funds in urope, and ust a out , in the nited tates. owever, merican mutual funds
tend to e much larger than their uropean counterpartsthe mutual fund industry has a out
trillion in assets under management, while uropean mutual funds manage around . trillion.

etail funds are structured so that each investor owns a share of the fund investors do not maintain
separate portfolios, ut rather pool their money together. Their appeal can generally e attri uted
to the ease of investing through them and the relatively small contri ution needed to diversify
investments. In the past years retail funds have ecome an increasingly integral part of the asset
management industry. They generally constitute a large portion of a rms assets under management
and ultimate pro ta ility.

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There are two ways that retail funds are sold to the individuals that invest in them through third
party rokers or fund supermarkets and direct to customer. The si e and readth of the asset
management company typically dictates whether one or two methods are used.

hird-party bro ers and fund supermar ets

The concept of a fund supermarket was esta lished in the nited tates over ten years ago
and arrived in urope y . The concept is uite simple rokerage rms or so called fund
supermarkets are pitching investment products managed y a diverse set of investment management
rms. Then, in , emerged fund supermarket unds irect. The company, once owned y
insurance giant rudential and internet ank gg , egan to offer a menu of investment
products managed y other investment rms. Today, unds irect says it offers , funds from
over individual fund managers. chroders, which maintains a securities services relationship
with mericas organ hase o., also offers a variety of investments managed y rival rms
to its customers.

ut the rise of the fund supermarkets has forced conventional rokerage rms to open up their
offerings to include more than a few select partners. It has also inuenced the way retail funds
market themselves. reviously, funds marketed to rokers expected rokers to push their products
to individual investors. ow mutual fund companies must appeal directly to the investors themselves
which is why you see so much advertising for companies like idelity and Vanguard .

The iggest difference etween the uropean model for a fund supermarket and in the is age.
Third party rokers and fund supermarkets in urope tend to market themselves to younger investors,
many trying to mimic plans such as mericas k . In the , these plans tend to e tailored to
older investors who are trying to manage money efore retirement.

irect to customer
Through an internal sales force, each asset management company offers clients access to the rms
entire suite of retail funds. This type of sales force is very expensive to maintain, ut some companies
have een extremely successful with this method. rior to the rise of rokers and fund supermarkets,
direct to customer was the primary vehicle for investment in many retail funds.

I TIT TI I V T
Institutional investors are very different from their mutual fund rethren. These clients represent
large pools of assets for government pension funds, corporate pension funds, endowments and
foundations. Institutional investors are also referred to in the industry as sophisticated investors
and are usually represented y corporate treasurers, s and pension oards. stimates suggest
they represent almost three uarters of the assets under management in urope. In the ,
a out per cent of assets are managed on ehalf of institutional investors, primarily corporate
pension funds and insurance companies.

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ore conservative
iven their duciary responsi ility to the people whose retirement assets they manage, institutional
clients tend to e more conservative and diversi ed than retail funds. nlike investors in retail funds,
institutional clients have separately managed portfolios that, at a minimum, exceed million. lso
unlike retail funds, they are all exempt from capital gains and investment income.

Institutional clients hold enormous sums of capital they must allocate to meet the needs of the
ene ciaries of retirement assets. onse uently, the representatives hire multiple institutional asset
managers across the full range of investment styles these styles, such as growth stocks and value
stocks, will e detailed in the next chapter .

ethod of selection
iven the high level of responsi ility associated with managing portfolios of these si es, pension funds
use a rigorous process for asset manager selection. In turn, asset management companies have uilt
considera le marketing and sales departments to cater to institutional clients. The selection process
typically works as follows

n institution, say a pension fund, issues a re uest for proposal an , announcing that it is
searching for new investment managers in a particular style or asset class.

sset management companies respond to the , ela orating on their history, products, services
and credentials.

Investment consultants are hired y the pension fund to help sort through the s and narrow
the list of rms to three to ve nalists.

The nalists meet in person with the pension funds representatives and further due diligence is
performed efore the winner is selected.

ecause of the sophistication of this process, there are many interesting professional o s in the
institutional sales, marketing and relationship management functions. If you are interested in the
investment usiness, ut dont necessarily want to participate in analysing and selecting portfolio
investments, these are career paths that you may wish to pursue.

In the mutual fund world individuals tend to select funds ased on recent performance records
and rand recognition. Institutions tend to select asset managers under a much more stringent and
analytical process. peci cally, they use the following criterion superior performance record
compared to competition, length of investment track record, continuity of the existing core
investment team and consistency in adhering to a speci c investment style and discipline.

I TW T
igh net worth individuals represent a small ut powerful client type. Individual wealth creation and
nancial sophistication over the past decade has driven asset managers to focus heavily on this area.

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f course, even some ultra wealthy investors were impacted y the turmoil of . ccording to
the errill ynch apgemini World Wealth eport, the num er of people who uali ed as W
individuals fell nearly per cent from , and W wealth fell . per cent to . trillion.
eographically speaking, high net worth individuals in the nited tates, apan and ermany made
up per cent of the glo al W population in , and for the rst time, hinas W population
ecame the worlds fourth largest, eating the .

ore recently, according to the Wealth anagement apgemini World Wealth eport, the
num er of people who ualify as W individuals increased . per cent during to million,
and W wealth rose per cent to . trillion. y the end of , orth merica made up .
per cent of the worlds W people, while sia aci c made up . per cent and urope made up
. per cent.

hat is high net worth

What is a high net worth investor e nitions differ, ut a good rule of thum is an individual with
minimum investa le assets of million. These investors are typically taxa le like retail funds ut
unlike institutional investors , ut their portfolio accounts are managed separately unlike retail funds,
ut like institutional investors .

igh net worth individuals also re uire high levels of client service as they may not necessarily e
the savviest investors. Those considering entering this side of the market should e prepared to e
as interested in client relationship management as in portfolio management, although the full force of
client relations is orne not y a portfolio manager ut a sell side salesperson in a rms private client
services or private wealth management W division.

In reality there are two classes of high net worth clients those in the million and a ove range
and those in the , to million range. Those with million and a ove to invest receive
customised and separately managed portfolios, whereas those in the lower racket do not. This
second class does receive much more personal attention from their salesperson than they
would from a traditional retail roker. ut, unlike the million and a ove range, this second groups
portfolio management is derived from cookie cutter products and strategies. till, this service is
performed y a portfolio manager devoted to high net worth clients, and assets arent actually lumped
into a large fund as they would e in a mutual fund.

igh net worth investors also often use the institutions that manage their assets for other nancial
services, such as estate planning or tax work.

lients and consultants

n investment management rms sales force typically sells high net worth services in one of two
ways either directly to wealthy individuals or to third parties called investment consultants who
work for wealthy individuals. The rst method is fairly straightforward. n investment managers
sales force, the unit, pitches services directly to the individuals with the money. In the second
method, a rms internal sales force does not directly pitch to those with the money, ut rather pitches
to the representatives, often called investment consultants, of high net worth clients. In general
investments, consultants play a much smaller role in the high net worth area than in the institutional

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side only extremely wealthy individuals will enlist investment consultant rms to help them decide
which investment manager to hire.

he nvestment onsultant
ot to e confused with retail rokers, investment consultants are third party rms enlisted y
institutional investors, and, to a lesser extent, y high net worth individuals, to aid in the following
devising appropriate asset allocations, selecting investment managers to ful l these allocations and
monitoring the chosen investment managers services. n investment consultant might e hired y
a client to assist on one or all of these functions depending on certain varia les, such as the clients
si e and internal resources.

s an example of the part that investment consultants play in the investment management game,
lets say s pension fund is looking to invest million in a certain investment style say, large cap
value e uities . hires an investment consulting rm to help it nd a large cap value manager. This
investment consultant will go out and search for the est managers in the sector and, one month later,
will come ack to with three recommendations. will review the three rms and then pick one.
fter makes its decision and the million is handed over to the chosen investment manager,
the investment consultant might also monitor that managers investment decisions.

True intermediaries, investment consultants have ecome increasingly important in the past years
as a result of a rise in the num er of different investment products.

V V .v . , x v ,
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THE g
gETTi
s Ep
Hir
ault areer
uide touide
Investment
to Investment
Ban ingManagement, European Edition

Chapter
b - 5:
v .Targeting
s - Your Job Search
Chapter
f 6:
r Who Are b thekAsset
w Management Employers?
t c a m g
i v s
T e n o o se c
Chapter 5

TTI T I T VI W
nce you understand the different types of rms, components of the usiness and the types of
positions availa le, you can egin to target your search. In this chapter, well focus on the different
types of rms, what they look for, and their hiring processes.

Investment management is open to any degree discipline, although a is re uired. owever, some
of the ma or rms may prefer a degree in the following disciplines

athematics
tatistics
conomics
ccounting

That said, many graduates with humanities degrees enter the industry ut many complete a masters
in a more related discipline to olster their chances. lot of the new hires in the industry have
postgraduate uali cations. erhaps this alludes to a more competitive o market, or may e
postgraduate uali cations are increasingly re uired. ccording to one graduate at a large investment
management rm, a postgraduate degree is an implicit re uirement. re entry experience isnt
necessary, ut it can e ene cial. esire to work in the industry is a massive plus for recruiters,
and any work experience within the nancial services industry helps display this.

imilarly, reading nancial press or running a shadow portfolio of securities will demonstrate your
interest. ccording to one insider, reading nancial press widely and thoroughly is a solutely essential
in uilding acumen and conveying interest, and is the one area in which most graduates are found
to e lacking. raduates and recruiters in the industry concur that, whereas talent is re uired, an
interest in the industry is one of the most important things.

otential candidates will need to show evidence of the following

The a ility to work under pressure and to meet deadlines e.g., to produce reports
umeracy and analytical skills
xcellent communication skills
elf con dence and am ition
n interest in current affairs and an appreciation of their impact on nancial markets
anguage skills can also e useful, and many new recruits have degrees in a foreign language.
lthough computer literacy is essential, it can e ac uired during training.

ost ma or investment anks use summer internships to pre select graduate recruits. ompetition
for these is often more intense than for graduate vacancies as there are fewer placements. losing
dates for entry to investment anks, stock rokers and specialist fund management companies
also known as investment management and asset management can e as early as the cto er
of your nal year, and, rarely, later than the following anuary. ome companies, particularly the
ig investment anks, run structured graduate training programmes and annually recruit for them.
thers may offer trainee positions as and when they are re uired.

47
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fter the initial telephone interview candidates will have to complete online ver al and numerical
psychometric testing. Those who are selected will attend an interview, normally with an manager
and manager or senior analyst.

he interview
side from understanding the industry and rms, cracking the interview is the most important step in
landing the o . ere this guide will explore the most common uestions asked of candidates during
o interviews. The uestions are segmented into three types ackground, analytical uantitative
and personality t.

recursor to the interview

The rst asic tenet for anyone seeking to enter the investment management industry is a uid
understanding of the nancial markets. ou should e conversant on the markets performance
and current drivers. n a very simplistic level, you should e a le to answer the following uestions

t what level is the T

What has performed etter over the last ve years, value or growth stocks
Where is the price of gold and oil
What factors drove the market to increase or decrease in any particular day

or specialty rms, your focus should e aligned with their strategy. or example, if you were
interviewing at a rm focused on international e uities, general knowledge of current exchange rates
would e a re uirement. The answers to these uestions can e found y reading The Wall Street
Journal and Financial Times on a regular asis or visiting nancial we sites.

I T I T VI W
It is common for candidates to underestimate the importance of preparation for an interview.
Interviewers are smart, well prepared and likely to e interviewing many candidates for very few
positions. If you do not have any knowledge of the nancial markets, they will nd out. Investment
managers are very picky a out the people they hire. It is not uncommon to have very senior portfolio
managers or analysts conduct the rst round interviews. econd interviews can e conducted y
company s. Therefore, the time spent getting ready for the interview may separate the candidates
that get the o from those who dont.

Interview preparation should start with an investigation of the company. o your research on the
rms history, usiness strategy, operating structure and nancial performance. ou do not need to
have contacts at the company to gather this information. ome great resources include the news and
company we sites, annual reports, sell side analyst reports, usiness newspapers and maga ines,
and industry pu lications such as Institutional Investor ensions Investments Bloom erg maga ine
and The Journal of ortfolio Management, as well as your careers service. rticulating to and showing
the interviewer that you know a out the company help exhi it your passion a out the position and the
diligence in your preparation.

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ext you need to plan how to position yourself during the interview. Think of an interview as a sales
presentation in which the product you are marketing is yourself. ou need to esta lish the points of
your ackground and character that will make you the ideal candidate for the o . To accomplish
this, we suggest the following

now every detail on your resume

repare answers to the common uestions detailed elow
xpect the unexpected
ractise repeatedly

ac ground uestions
w o o n c n cco l en od e

It is important when answering this uestion to focus on an accomplishment that highlights the skills
needed to e successful in the speci c position for which you are applying. or instance, when
interviewing for an investment research associate or analyst position, mention an accomplishment that
re uired keen uantitative skills, pro lem solving a ility and success as a team mem er. e sure when
answering this uestion that you provide tangi le and measura le results to your accomplishment.
or example, as a result, the company increased revenue y per cent, or as a result, the
portfolios performance exceeded its enchmark.

Tell e o ecen o e on le e encew en o d ocon nce o eone o cce

o de

The interviewer wants to know how effective you are at articulating your recommendations and in
defending your opinions. This is an important part of eing an investment professional. great way
to answer this uestion is to state whom you were trying to convince and why they opposed your point
of view. Then highlight how you overcame this. or example I supported my analysis y outlining
and measuring the potential risks associated with the pro ect. y clearly comparing the strengths
and the weaknesses of the pro ect, my oss saw the merit of investing in the usiness. inish your
example with measura le and tangi le results.

w e o o n n o le ned n o l o ndw d d o le e

or those ust graduating school this uestion is less likely, ut for others it is uite common. When
answering this uestion e positive, even if the story did not end happily. Think a out how you can
link the skills learned in your last o , to the relevant talents needed for the new desired position.

e o n e e ed n e de n e do e ell de

This uestion is often asked to gauge your knowledge of the differences etween the two sides of the
usiness. ost interviewers are not looking for a speci c answer, ut rather a reasona le rationale.
ccepta le answers might include references to closer interaction with portfolio managers, more
input into the investment decisions and dedicated focus on performing investment analysis instead
of marketing and writing investment reports .

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Analytical and uantitative uestions

The level of dif culty of analytical interview uestions depends on the level of position you are
interviewing for. nalytical uestions will generally e a out stock recommendations and valuation,
the economy or nancial accounting. ew graduates might not e expected to know such uestions
as most rms will have a month or so of intensive nancial training. This helps to ring graduates from
humanities ackgrounds up to the re uired standard.

toc and bond recommendations and valuation uestions

Howdo o o o l n co n

There are two generally accepta le answers to this uestion. The rst is using a discounted cash ow
approach, and the second is to use a compara le nancial multiple analysis. e sure you know
the differences etween each and why most analysts dont use a approach in valuing companies.
ainly, they argue it is very dif cult to predict accurate discount rates and terminal values for the
company. In the next section we will outline these two ways of valuing companies.

nalysts compare their own valuation of a company to the current stock market valuation. If analysts
valuation of the company is greater than the stock market value, then they would typically recommend
its purchase. Industry analysts typically use a relative valuation approach. This approach compares
multiples, such as and V IT , among companies in the same industry. Industry analysts
use relative valuation to determine stocks in an industry that appear cheap or expensive relative to
each other.

Tell e o ock o nkwo ld e ood n e en od

This uestion is known as the stock pitch. ou should e prepared to discuss at least one stock
during this interview. or those of you interviewing with traditional asset managers, it will likely e
a stock pick that you expect to perform well over the long run. owever, if you are interviewing at a
hedge fund, you may e asked to pitch a stock that will perform well over the next uarter or two you
may also even e asked to pitch a short idea a stock you expect to decline .

The interviewer is not interested in your investment opinion, ut rather your a ility to present a well
organised approach. The interviewer, most likely, will want you to keep your stock pitch rief ve
minutes . it the highlights uickly and focus on eing persuasive. In many cases the interviewer
will let you present for several minutes then inter ect with uestions along the way. The steps listed
elow will assist in preparing a well articulated thesis for any company

. verview of the company and its competitive position

Identify ma or products and highlight their current market share and growth rates this also
includes market cap and revenue to provide the interviewer some ackground information .
ompetitive advantages i.e., rand e uity, rst to market, strong management team, su stantial
free cash ow, innovative product development and strong customer service

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. Industry analysis

um er of competitors
rowth of the market, i.e., impact of external factors such as the economy, news and customer
demand

. nalysis of the companys future prospects new products, etc.

nalyse managements growth strategy

Identify usiness drivers
oes the company have the correct product mix to match future customer demand
Will earnings grow through cost controls, price increases, or unit sales increase

. Investment risks it is important to uantify the things that can go wrong when determining a
proper value for the company.

ensitivity to macroeconomic conditions

anagement succession
egulatory changes
hanging operating input prices

. ecent nancial performance stocks go up and down ased on their performance versus
expectations. or instance, if investors expect per cent earnings growth and the company
only produces per cent, the stock price will most likely fall.

ighlight company earnings and sales growth vs. the industry and expectations.

easure the progress of operating margins.

Indicate market share gains.
Identify any aspects that differentiate your opinion from the markets i.e., if sell side analysts
expect growth of per cent and you expect per cent, say why .

. inancial valuation of the company relative to industry compara les

lease see the valuing a company section of this ook.

teps to are incorporated into the nancial predictions used for valuing the company.

. ummarise your investment recommendation.

ome companies may ask for a full, written investment report, so preparing this type of analysis in
a written form may e a good idea. The key factor to note is that this is not a consulting pro ect or a
company i liography. The stock pitch should e concise and to the point, hitting only the key drivers
that will dictate future stock performance. uantify any points you are making whenever possi le.
or example, instead of stating that a companys competitive advantage is the patent protection of
its product mix, you should state that per cent of all products sold carry a patent that prevents
competition.

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acl en n e e cen cke c o ce e ween ee e l n eld n e cen

nd co o e ond eld n e cen c o ld ec oo e wo ld e eld e o
eon eco o e ond no de o ee len o e ee ond

ou have to compare the instruments on the same asis to decide. ecause the yearling ond is
tax free, you have to nd the after tax yield of the corporate ond and compare it.

Take the corporate ond rst and consider a one year period for simplicity. uppose the client
invested , and earned . per cent. f this per cent will e taxed, so the clients gain is
t y . . , . . This is e uivalent to a tax free yield of . per cent.
o, as the yield of the tax free ond is greater than the after tax yield of the corporate ond, the client
should choose the yearling.

To determine the yield that will give parity etween the corporate ond and the yearling, use the
formula after tax yield on corporate tax free rate or, t ycorp ytax free, then ycorp ytax free
t . or this example the yield on the corporate ond would have to e . . . per
cent to e e uivalent to the tax free ond. If corporate ond yields are lower than . per cent,
choose the yearling otherwise, choose the corporate ond as the higher yield will offset the cost of
the tax.

wo ld e ood n en o e o ed e o ol oo e e ed ock

s preferred stock is similar to onds that never mature perpetual onds , the est hedging instrument
would e a long maturity, risk free instrument such as a T ond option ased on long term treasuries.

i o e n co o e ond w c o e ec l e:a a o

is the most speculative of these ratings.

i cl en c e e cen ond ell n eld o o e cen w

e o n o e e nn l n e e en

ield is unimportant here. It is the coupon payment, per cent of , each year is or
every six months. ont get confused if the interviewer adds extra information to the uestion.

Howc n o ed ce e ko o ol o

ou add instruments for diversi cation. opefully these instruments are not well correlated with each
other, so overall they reduce risk. or e uities, theoretically, you need a out different stocks for
ef cient diversi cation. There are many forms of risk credit risk, li uidity risk, country risk, market
risk, rm speci c risk and so on. ou can also include hedging instruments for example, if you own
a particular e uity, you could put options on it.

w n ow n ec n nc l o c r E

warrant is a security similar to an option on a stock, except a warrant usually has a longer life time
until it expires than a call. Warrants may often e attached to issues of preferred stock or onds
to make the issue more attractive to investors, ecause warrants offer the opportunity for some
participation in stock appreciation. When the warrant is exercised, the owner pays the stated strike

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price in exchange for new shares of common stock. ll other things e ual, whenever a companys
num er of common shares outstanding increases, measures such as and should decrease,
ecause the shareholders ownership is diluted.

conomic uestions
econo c nd c o do o nk e e e e c on e ock ond ke

There are many good answers to this uestion, ut the est approach is to discuss economic factors
that are currently having an impact on the market. The interviewer wants to know that you are well
informed on current market dynamics.

ou should read several leading nancial periodicals prior to any interview, such as The Wall Street
Journal, the Financial Times and The conomist. rticles in these maga ines will provide you with the
current economic inuences on the market.

In general you should know that investment analysts pay close attention to weekly, monthly and
uarterly economic reports. nnouncements of these economic indicators have ma or impact on
e uity and ond market performance. The most heavily watched economic reports include

onsumer price index measures ination

nemployment company la our costs and pro ta ility are driven y the level of employment
in the market.

ross omestic roduct measures the growth of the entire domestic economy. nalysts use
to forecast the sales levels and pro ta ility growth rates of companies.

nit la our costs measures the productivity level of workers

Well prepared interviewees will know the current level, past trends and future expectations of each
of these indicators.

c end n e nd o e o l wo ked n

This uestion is designed to gauge your a ility to think strategically. In essence, the interviewer is
asking, can you identify the

trengths and weaknesses of the industry

evel of competition
egulatory changes
Impact of economic changes
ew innovations
Industry threats

The key points of this exercise are usually summed up in a W T analysis, which reaks down a
companys strengths, weaknesses, opportunities and threats.

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inancial Accounting uestions

eec ow

It measures the cash availa le after ad usting for capital expenditures. opular uses of free cash ow
are dividends, stock uy acks, ac uisitions and investing in new usiness developments.

ree cash ow is computed from the following nancial statement line items

et Income

epreciation and amorti ation

ear over year changes in deferred taxes

ear over year change in net working capital current assets current lia ilities

ash low from perations

apital xpenditures

ree ash low

Howdo o c lc l ewe ed e eco o c l a

ssentially, it is the average cost of o taining capital from all sources of nancing de t and e uity
stakeholders . efore determining the weighted average, you must rst determine the orrowing rate
of each form of nancing. uity cost of capital is found y using , which is computed as follows

ost of uity f m f

Where

f isk ree ate of the market t ills

eta of the stock

m istorical stock market return

e t cost of capital current yield is often estimated as the companys after tax interest expense
divided y its ook value for long term de t.

nce the cost of e uity and de t are computed, a weighted average is used to determine the
companys W . The companys market capitali ation is used for the e uity portion, whereas the
market value of the companys onds is used for the de t allocation.

or example, assume that the companys cost of e uity was computed as per cent using ,
the cost of de t was computed as per cent, and the tax rate is per cent. nd assume that the
stock market valuation of the company was illion and the market value of the de t was illion.
Therefore, the percentage of e uity nancing would e e ual to illion illion illion ,
or . per cent. e t nancing would account for . per cent of the overall nancing, illion
illion illion . Therefore the W is

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W Weight of uity ost of uity Weight of e t fter Tax ost of e t

or

W . per cent per cent . per cent per cent . . per cent

ersonality it uestions
e edo o ee o el n e e

This uestion is designed to test the career focus of candidates. When answering this uestion e
certain to have reasona le goals that are well aligned with the rm you are interviewing with. or
example, if you were interviewing with a rm that emphasi es a team portfolio management process,
you would not want to descri e your aspirations for eing a star at the rm. ou should also note
that employees of many traditional asset managers end up staying at the rm for the duration of their
career. While you can take comfort in the high level of career satisfaction this statistic suggests, also
realise that if you are a career switcher or your resume shows multiple o s, you should e prepared
to show commitment to your future career.

o e e e e on o wo k n n e n e en

This is one of those negative uestions that you have to e very careful in answering. In essence,
the interviewer is asking for your weaknesses. e certain that your answer does not highlight a
fundamental aw that would e detrimental to your success in the position you are interviewing for.
or example, I am not really good with num ers or I dont ever want to work on the weekends.

e o o o do

This is a great place to talk a out extracurricular activities or personal interests. This helps the
interviewer get to know you etter. e prepared to share interesting anecdotes that show a passion
for the activities you have pursued. This is also a great place to highlight your a ilities as a leader.

lthough the initial interview is very tough, its not the end of the road at most rms although some
will only perform two interviews as the whole recruitment process . Investment management is highly
competitive, and as a result, the hiring process is extensive. fter the interview candidates will e
asked to attend an assessment centre where they will complete various exercises including more
tests and a group fund management exercise. In the group fund management exercise a group of
candidates will e asked to act like fund managers, to respond to economic developments y adapting
their portfolio. efore the assessment centre you may e given a week to prepare on a company and
will have to write a out this company under test conditions on the day. The nal round will normally
include another interview with senior personnel as well as a presentation on a topic related to fund
management. t some rms, such as enderson, there will also e an interview with the .

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W TT W T
ecause its dif cult for some undergraduates to enter asset management through the front
door, several slide into the industry through the side. lthough theres no common professional
ackground that de nes asset management success and, in fact, diverse ackgrounds are great
ene ts to investment management companies , lateral hires typically come from o s in I anking
or management consulting, or from respected T corporations.

In investment anking and accounting youll gain uantitative knowledge such as company valuation
and nancial statement analyses similar to that used in asset management. Investment managers
also like candidates with management consulting, especially strategic consulting, ackgrounds,
ecause consultants have usually o tained the skill to uickly immerse themselves in and learn
a out an industry. arketing research professionals from large corporations are also highly regarded
in asset management, ecause they have expertise in learning a out different companies and how
they compete in the marketplace.

W IT
efore em arking on your o search, you must ask yourself the following uestions o I want to go
into e uity or xed income m I interested in growth investing or value investing What investment
style suits me What kind of research do I want to do What si e of rm do I want Where do I
want to live nswering all these uestions will not only allow you to narrow down what could e an
extremely exhaustive search, ut will also help you at interview time, ecause rms will de nitely ask
you, Why us

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 o e ea e M n e en E lo e
Chapter 6

I W I T I V .
I I T I

arge generalist rms

s we discussed earlier the industry has gone through dramatic changes over the last years.
onsolidation and glo alisation have transformed the industry from its fragmented specialist
structure. Today, asset management is part of nearly every nancial services rm, oth in urope
and a road. or the sake of simplicity, we have assigned asset managers to ve general categories,
and listed a few examples in each platform.

e o E le

p v g f ,b G

dv v k/ m g s a m g , Jpm g
v k a m g

dv g k d b ka m g

dv l g &G

s you can see, most of the large investment management rms are actually divisions of roader
nancial services companies. owever, in many cases, the asset management divisions are run as
entirely separate autonomous entities. In other cases, the parent predicates the culture and focus
of the usiness. s you explore career options in the industry, do your homework a out the rms
structure and understand how the division operates.

pecialist rms
lthough the industry has shifted somewhat away from specialist rms, their role continues to e
in demand ecause of the speci c expertise they can provide. These rms are located throughout
urope and have relatively smaller staffs and vastly different cultures. s we have already said,
sometimes smaller rms have the ene t of higher returns whereas companies with igger portfolios
can end up mimicking indices.

enerally, the smaller rms do not actively recruit. This means its up to you to target each rm,
research its specialty, and contact them directly.

57
V c G i v m g ,e e
W a m g e ?

I I
The investment industry is a vast one encompassing thousands of rms and tens of thousands of
investment groups within corporations, unions, foundations, schools and government institutions.
ow can you determine whether a particular rm is the right one for you to oin irst, you must
understand the kinds of rms within the usiness and how they tend to hire.

ier comple es
Tier complexes are mutual fund families that offer a complete or nearly complete range of
products. They serve signi cant num ers of retail, institutional and high net worth customers,
and will have at least illion under management. These rms, such as idelity, are well known
throughout the industry.

H n
These rms hire primarily through recruiting at top programmes or raiding other rms. ome
will hire candidates, ut typically only from a top university. Inexperienced hires will e rought
on as unior research analysts.

po
reat exit opportunities
igh pay
uperior access to companies and sell side analysts
irms diverse product lines insulate against downturn in your industry
xtensive travel re uired

on
ureaucracy
Internal politics
xtensive travel re uired

op-tier bouti ues

Top tier outi ues are rms that specialise in a particular avour of instrument, industry sector or
style. They are nationally or internationally recognised for their expertise in that specialty. top tier
outi ue will have etween illion to illion under management.

H n
Top tier outi ues hire in a similar fashion to gold plated megaplexes. owever, if their specialty is
currently out of favour, an especially persistent ut atypical candidate can sometimes o tain a position
at a top tier outi ue.

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po
xit opportunities, oth at graduate schools and within the industry
uperior access to companies and sell side analysts
igh pay

on
ccasional lack of support staff
xtensive travel re uired.

ier comple es
Tier complexes are large fund complexes that have a complete or nearly complete product line.
owever, they are not regarded as highly as tier complexes or top tier outi ues. They will often
e attached to a ank whether commercial or investment , insurance company or other nancial
conglomerate. Tier megaplexes will serve mainly retail and high net worth clients.

H n
Tier complexes are often scattered in their hiringhiring internally, recruiting at the undergraduate
level at local universities and at the graduate level at oth local and top universities.

po
uperior access to companies and sell side analysts
irms diverse product lines insulate against downturn in your industry
ood pay

on
ureaucracy
Internal politics
xtensive travel re uired.

ld-line rms
ld line rms are rms that often were started in the s or even efore . They are generally
value xed income shops and focus on capital preservation. They will have a mix of old money, very
high net worth clients and local institutions.

H n
s hire at top programs. ccasionally, they may also hire laterals from other value
oriented rms.

po
xit opportunities, oth at graduate schools and within the industry
uperior access to companies and sell side analysts
ood pay
ta le rms, positive though conservative cultures

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on
ureaucracy
irms stodgy philosophy may not appeal to you.
irm expects you to stay with them for many years and structures pay and advancement
accordingly.

niversities, foundations and pension plans

These are generally tax exempt pools of money. In most cases, the great ma ority of assets are
outsourced to various outside top rms. The investment staff at these institutions select and monitor
these outside managers. mall portions of the assets can e managed internally.

H n
The top tier institutions prefer to hire graduates who have spent a num er of years post
at a premier uy side or sell side rm, ut who would like to reduce their working hours.

po
xit opportunities, oth at graduate schools and within the industry
igh o security
reat ene ts
ess stressful environment and culture

on
ureaucracy
ocus is on asset allocation and monitoring, not in house management.
elatively low pay
if cult to get active management o s ecause of lack of experience

nsurance companies
Insurance companies often manage extraordinarily large sums of money and are the largest asset
managers in the . This money is derived from policy payments and set aside against potential
claims. Insurance companies have historically invested mainly in high grade, xed income instruments.

H n
Insurance companies generally hire investment staff from local universities. istorically, insurance
companies have een una le to attract many candidates from top university programmes.
Insurance rms will hire at oth the and levels.

po
igh o security
reat ene ts
ess stressful environment and culture

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Willing to hire non Ivy candidates

ood learning environment

on
ureaucracy
ocus is on high grade, xed income.
ow pay
ow prestige
xtremely conservative investment styles

edge funds
ive years ago, o taining a o at a hedge fund would have re uired navigating through a la yrinth
of networks and connections to meet the right people. owever, as hedge funds have ecome
much larger, recruiting has ecome more formal and closely tracks a similar process to retail funds
and investment advisory rms. edge fund o s are not necessarily more prestigious than other
opportunities availa le. ore importantly, the industry generally does not truly distinguish etween
a hedge fund specialising in, say, energy and a mutual fund that does so. ach fund will e udged
according to performance, si e, reputation and uality of personnel.

I T I I I T
nlike most other industries, the investment management industry encompasses literally thousands
of rms, most of which either do not advertise themselves or are even legally arred from doing so
hedge funds, for example . uch of the time you are dealing with a o search in which your potential
future employers are unknown entities to you. o what sources and criteria should you use when
evaluating a potential employer

f we e:s o
ne of the most helpful portions of an investment management rms we site is the staff pro les. This
is the premier consideration in evaluating a rm. If the staff are good, you will likely have, at minimum, a
reasona le experience there. If the staff are weak or poor, you will likely have a su par experience there.

ow to evaluate staff pro les Two things to look at are the staffs experience and education. t
minimum, all principals should have signi cant experience at top, recognisa le uy side or sell side
operations. lso, most or all of the principals should have degrees oth undergraduate and graduate
from top universities. If some of the principals have non uy side experience, it should e at a
recognised company or institution. ost of the rms analysts should have similar ackgrounds as
well though, o viously, less experience in terms of years and positions held .

ig warning signs include one or few of the principals has signi cant experience at a top rm.
one or few of the principals has a graduate degree from a top university. nalysts have weak
academic and or work ackgrounds. o full analyst should have less than three years experience.
ny signs of nepotism. ists of degrees from unrecognisa le universities and or work experience
at unrecognisa le rms. issing periods in ios.

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a e nde n e en
If the rms we site does not tell you how much money the rm manages, this information should e
o taina le from the internet. or a hedge fund, million under management is a good general
mark of a fund with a healthy amount of money under management. or regular uy side rms, rms
with signi cantly less than million should e viewed cautiously.

The investment management usiness is one where you derive your pro ts from the amount of money
you manage. edge funds also gain a portion of the pro ts they achieve. ny good manager with
signi cant experience at a top rm can walk out the door with commitments of, at a minimum,
million. ome have walked out with commitments of million to illion. Therefore, a rm
that cannot reak the million mark ust does not have the needed staff to e a le to compete.

o e one do e n e
ou want to oin the smartest rm you can. ow can you tell whether a rm is smart and a le to grow
valuate the rms clientele. The smartest clients in the usiness are the university endowments, large
foundations, certain smart corporate pension plans and some funds of funds a mutual or hedge fund
that invests in other mutual or hedge funds . ot only do these institutions have ne internal staffs
with large udgets to investigate potential managers, ut they are advised y numerous consulting
rms that also research money managers. ot only will these institutions generally select top rate
managers ut, if these managers perform, the institutions have much larger amounts to give them. It
is a serious negative if the rm has not een a le to attract any of these investors. It means either the
staff do not have the level of experience and education to gain these institutions trust, or their product
and or investment strategies are unappealing, ill formed or incomprehensi le.

The remaining potential client ases are retail and high net worth investors. Those with retail
investment clientele run retail funds those that cater to high net worth individuals run individual
accounts.

ow do you nd out a out the rms clientele sk them! ou can also check manager announcements
on the internet when a pu lic pension plan puts money with a new manager, this information is
pu lished .

ou should target rms that est t your ideal working environment. The est resources for learning
this information are company we sites and through networking with employees from the respective
rms. or more information, check out Vaults insider company pro les and message oards.

62 2014 V . ,i .
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THE
s ault
ault areer
uide to
uide
p
Investment
to Investment
Ban ing
Management, European Edition

Chapter
b - 7:
v .Portfolio
s - Management
Chapter
f 8:
r Investment
b Research
k w
t
Chapter
c 9: Marketing/Sales
a m g and Operations
i v
Chapter 10:s Days in the Life
po ol oM n e en
Chapter 7

T T T
s we discussed in hapter , asset management rms are organised into three segments portfolio
management, investment research and marketing sales and operations. ollowing is a diagram that
explains this structure. s you can see from the diagram, oth portfolio management as well as
account product management serve the client whether they are individuals, institutions or high net
worth investors . lternatively, investment research falls under portfolio management, indicating its
support of the investment process. Whereas this represents a traditional hierarchy, asset managers
can have varying structures. In many cases, the research analyst can also report directly to the client
if he she has money management responsi ilities. n example of this would e idelitys elect
funds in which the industry analysts manage money directly in their industries of expertise. In the
following sections, we will descri e the three segments and the o s associated with each.

Client

Por olio Manager Account/Product

Manager

Por olio Account

Analyst/Associate Management
Associate

Research Product
Analyst Management
Associate

Research
Associate

Research
Assistant

65
V c G i v m g ,e e
p m g

ortfolio anagement
This is the science of making decisions a out investment, matching investments to o ectives, asset
allocation for individuals and institutions, and alancing risk against performance. It is, in essence, the
usiness end of the industry, the department that pulls the trigger. There are four o s that typically fall
under this component of the rm portfolio managers, portfolio analysts or associate portfolio managers ,
portfolio manager assistants and, at some rms, portfolio implementers. niversity graduates often
ll portfolio assistant positions, whereas individuals with many years of investment experience hold
associate and senior portfolio manager assignments. ortfolio implementers can e hired straight from
undergraduate degrees. s are not hired as portfolio managers right out of usiness school, unless
they have a lot of experience. Typically, s who wish to pursue a career in portfolio management oin
investment management rms in their investment research divisions. fter several years in research,
s will then have a choice either stay in research or leverage their research experience to move
into an associate portfolio manager position or roaden their experience y covering additional sectors.

I T I
ortfolio managers are responsi le for esta lishing an investment strategy, selecting appropriate
investments and allocating each investment properly. very day, portfolio managers are presented
with investment ideas from internal uy side analysts and sell side analysts from investment anks.
It is their o to sift through the relevant information and use their udgment to uy and sell securities.
Throughout each day, they read reports, talk to company managers and monitor industry and
economic trends looking for the right company and time to invest the portfolios capital.

The selection of investments must adhere to the style of the portfolio. or instance, a large capitalisation
growth manager might e screening for only companies that have a market capitali ation in excess
of illion and earnings growth characteristics that exceed its industry average. Therefore, the
portfolio manager would not even consider a million utility stock, with a per cent dividend yield.

nce investment opportunities are recognised, portfolio managers must decide what percentage of
their portfolio to allocate to the respective security. This decision is ased on the mandate of the
portfolioactive or passiveand the risk expectation of the overall portfolio. or example, riskier
portfolios invest in a small num er of securities and take large ets. These are often referred to as
concentrated funds. lternatively, diversi ed portfolios may invest in over securities to spread
the risk of any one holding.

ortfolio managers also spend time meeting with their clients to review investment strategy and
performance results. Whereas account and product management professionals lead this process,
portfolio managers are often an integral part of client discussions. In the mutual fund world, portfolio
managers do not spend time talking to individual customers, ut they are often called on to present
at sales conferences and at product road shows. owever, institutional and high net worth portfolio
managers have fewer clients, and they only meet with them one to two times a year.

ortfolio managers are the most seasoned investment professionals in the rm. Typically, people with
at least seven to years of investment experience occupy these positions, and most have either an
and or a uali cation.

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I T T I
The associate portfolio manager position re uires a , or considera le investment experience.
Typically, the o is lled y successful research analysts who have at least three to ve years of analyst
experience. arger rms may also recruit s to t this role straight out of usiness school. The o
is very similar to that of the senior portfolio manager with one main exception associates interact less
with clients than senior managers do. ssociate portfolio managers usually are assigned smaller, less
sophisticated portfolios to manage or serve as lieutenants on large, complicated portfolios.

The role of the associate portfolio manager differs depending on which segment of the market is eing
servedmutual fund, institutional or high net worth. or instance, associate portfolio managers at
many mutual fund rms will either act as the lead investor on a sector fund or as second in command
on a large diversi ed fund. epending on the rm, an associate could also act as a lead on a
sector fund and as second in command on a diversi ed fund at the same time. lternatively, on the
institutional side, associate portfolio managers typically apprentice with seasoned portfolio managers
on the largest and most complicated portfolios. fter they have succeeded in that role, the rm will
assign them smaller institutional accounts to manage on their own.

lthough there is no de ned career track, successful associate portfolio managers could e promoted
to senior portfolio managers within three to ve years depending on the associates track record.

a oc e o ol o n e o ndcon
on

Great position in which to showcase your Always being graded on investment decisions
investment talent

Clearest path to running the Competitive, high level of scrutiny

big-time portfolios

Autonomy and creative independence Limited client interaction

High degree of focus, smaller accounts or

sector funds

T I T
In general, portfolio manager analysts screen for potential investments, monitor portfolio characteristics
and assist in client relations. nalysts typically spend two to four years in this role efore returning to
usiness school or migrating to a role in the investment research department.

This position varies among the rms in the industry and also differs depending on which segment
of the rm you work inmutual fund, institutional or high net worth. or instance, high net worth
portfolio analysts spend more time working with clients, whereas institutional analysts spend more
time monitoring and analysing portfolios. egardless, the general assignment focuses on supporting
the portfolio manager.

V V .v . , x v ,
g , x v w , V J b . 67
V c G i v m g ,e e
p m g

ortfolio manager analysts are often instrumental in the process of screening for potential investments.
sing the general strategy of the investment products such as market capitalisation, earnings growth,
valuation multiples or industry, the analyst screens all availa le stocks in the market to identify the
smaller list that meets the portfolios criteria. The screened list for an active portfolio varies ut
typically ranges etween and securities. ortfolio manager assistants then gather additional
research for the portfolio manager to egin the process of fundamentally analysing the potential
investment.

nce investments are made, portfolio manager analysts are responsi le for monitoring the
reconciliation of the trades. In this role, they work with the operations staff to assure that the portfolio
is properly updated and performance records are accurate. ost rms have separate operations
departments that reconcile trades and produce monthly client reports. owever, many of the smaller
rms re uire their portfolio analysts to perform the operations function as well. ou should e aware
of this and clarify the exact o responsi ilities when applying and interviewing for the o .

ortfolio analysts also participate in the process of client service, although the proportion of time
spent in this area depends on the client type eing served. or instance, an analyst to a mutual
fund portfolio manager would spend very little time on client service. Institutional and high net
worth portfolio managers have fewer clients and they meet with them one to two times a year.
Intermittently, their clients re uire vast and detailed investment reports and market commentaries.
Whereas marketing helps prepare these formal presentations, the portfolio manager analyst plays a
crucial role in collecting economic and market data for investment commentary and portfolio analysis
sections of the report.

The position re uires a person who understands capital markets, is capa le of meeting deadlines and
en oys working on multiple pro ects simultaneously. The downside is that the reporting and operational
components of the o have a uick learning curve and then ecome repetitive. urthermore, it is
not the est place to learn how to really value companies. ather you are eing exposed to the years
of experience that the portfolio manager possesses. ost importantly, portfolio manager analysts
receive the ene t of seeing a road picture of investing money across several industries, whereas
research analysts typically get exposure to one component or sector. ll in all, in the right setting,
the position is a great introduction to asset management and a worthwhile apprenticeship to pursue.

po ol o n e n l o ndcon
po on

Broad exposure to various industries No expertise in a single industry

Reasonable working hours Less formal training process

Direct exposure to the portfolio managers Some operations work

Repetitive assignments

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T I I T
This position varies depending on which rm you work at. ortfolio implementers assist fund
managers in their day to day trading. They keep an eye on capital markets to see how funds are
affected and check the cash levels of a fund. If cash levels are too low or too high they will liaise with
the fund manager to see what he or she would like to do. They also advise managers on corporate
actions, such as companies paying dividends, and liaise with the trading desk if the manger wants to
reinvest. ortfolio implementers also ensure the positions of funds are in strategic alignment.

The role re uires an understanding of capital markets, and many new hires in this type of role have
economics related degrees. ost also have to pass the I . It also re uires excellent communication
skills fund managers are extremely usy so portfolio implementers need to e a le to articulate
themselves concisely, and extract any information they need effectively.

po ol o le en e o ndcon
on

Frequent and direct exposure to fund No expertise in a single industry

managers and how a fund is run

Good working hours Operational side

Varied assignments Less formal training

V V .v . , x v ,
g , x v w , V J b . 69
in e en r e e c
Chapter 8

The investment research segment is responsi le for generating recommendations to portfolio managers
on companies and industries they follow. imilar to the portfolio management segment there are
several positions in the research hierarchy including analyst and, depending on the rm, associate.

n the sell side, senior analysts typically have three to ve years of post research experience
or six to years of post university experience if an was not pursued . n the uy side
graduates typically occupy the analyst position. The research associate analyst is typically a sell side
position. These positions are usually occupied for several years or until the candidate is deemed
capa le of covering his own sector. oth uy side and sell side rms employ university graduates as
research analysts. It is typically a two to three year program that can lead to a more senior position
or result in the associate returning to usiness school.

I T
enior research analysts are investment experts in their given industry focus. n e uity analyst
covers stocks a xed income analyst covers onds often simpli ed to de t .

Their role is to predict the investment potential of the companies in their sector. Take an e uity analyst
covering technology companies, including pple, for example. The analyst would e responsi le
for predicting pples future earnings and cash ow, and comparing the fair value of pple to the
expectations of the stock market. To do this, the analyst would uild a nancial model that included
all of the potential varia les to derive pples earnings and appropriate value e.g., sales growth,
usiness costs, as well as research and development .

xed income analyst focusing on telecom, for example, might e looking at a new high yield
corporate ond issued y an incum ent. The main thing the analyst will e looking for is the
companys a ility to pay off that loanthe amount of the ond. The analyst will look at historical
cash ows, pro ect future cash ows and look at other de t o ligations that might e more senior to
the new ond. This will tell the analyst the likelihood that the ond will e paid.

nalysts spend a considera le amount of time attending industry conferences, meeting with company
management and analysing industry supply and demand trends to derive usiness forecasts. ell
side analysts follow around to companies and must e an expert on each, whereas uy side
analysts typically follow even more companies.

n important part of a senior research analysts o is to convey his or her recommendations to the
portfolio management teams. Therefore, a senior analyst spends considera le time presenting to
portfolio managers and issuing investment reports. ecause of this, a senior research analyst must
e articulate and persuasive in his or her convictions to earn respect within the rm.

enior research analysts typically have served as investment research associates for three to ve
years, post or , efore assuming their positions. If successful in their role, many senior
analysts move into portfolio management roles later in their careers.

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I V T T I T T
This is the role for most s or those with e uivalent experience. It is typically a sell side position
ut some larger uy side rms employ the position as well. ssentially, associate analysts have the
same responsi ilities as senior research analysts with one exception associate analysts are given
smaller industries to follow. Typically for the uy side, the industry assigned to an associate analyst
is a component of a roader sector that is already eing analysed y a senior analyst. or instance,
an associate analyst might e assigned s and work closely with the senior analyst in charge of
insurance companies. s stated a ove, the more likely scenario is for the to enter the uy side
as the senior analyst. n the sell side the associate analyst will typically work under the senior analyst
for several years efore ranching off on his own to cover a su sector.

The associate analysts create investment recommendations in the same manner as senior analysts.
In general they spend several weeks familiarising themselves with their industry y reading industry
papers, ournals and text ooks, and attending industry conferences. large percentage of their
time is spent monitoring industry and company trends to predict nancial results for the company.
Therefore, associate analysts are constantly speaking with management, customers and suppliers
to gauge the current status of the company they are analysing. rmed with nancial models and
fundamental company analysis, they develop investment recommendations that they distri ute to the
senior analyst or rms portfolio managers on the uy side .

ne of the greatest challenges for new associate analysts is the steepness of the learning curve.
enior analysts and portfolio managers do not have the patience or the luxury to allow analysts to e
uninformed or consistently incorrect. ew associate analysts work extremely hard uilding trust with
their superiors.

viously, nancial acumen and uantitative skills are a must for associate analysts, ut communication
skills are also critical. ssociate analysts need to e a le to clearly and persuasively communicate
their investment recommendations. They must also e a le to respond to detailed in uiries from
portfolio managers that challenge their ideas, something that re uires strong tact and a great deal of
patience. urthermore, associate analysts need to e energetic, diligent and intellectually curious.

in e en e e c oc e n l o ndcon
po on

Autonomy and creative independence Steep learning curve

High level of responsibility Always being graded (on your recommendations)

Pays well Difcult to earn respect from portfolio managers

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I V T T I T
Investment research associates work with senior research analysts or in some cases, associate
analysts to help in developing investment recommendations for portfolio managers. niversity
graduates will typically spend two to three years as analysts efore graduating to this role.

The investment research associates are responsi le for helping to monitor the industry and changes
within companies covered in the industry, and to update nancial models accordingly. ssociates
collect data for industry data services, company conference calls and surveys. or instance, in the
previous pple omputer example, the associate would e collecting data a out consumer demand
and input prices for semiconductors. dditionally, the associate provides support to the senior analyst
in the construction of recommendation reports sent out to the portfolio managers. peci cally, the
associate updates charts and modi es numerical sections of the report.

lthough some of the work is routine and the hours are long, associates are sitting next to, and
learning from, the intellectual capital of the rm. If you work for a good senior analyst he will teach
you the ropes, including the intangi les ehind analysing companies, nancial valuation and industry
knowledge.

The role of investment research associate re uires a high level of uantitative knowledge. rimarily, a
asic working knowledge of accounting, nancial markets, nancial analysis and statistics is needed
for this position. side from a strong uantitative ackground, research associates need to e detail
oriented, analytical pro lem solvers, diligent and superior communicators. enerally, rms are looking
for nance or accounting degrees, ut engineers and science ma ors are also coveted.

in e en e e c oc e o ndcon
po on

Great quantitative experience Long hours (60+ hours per week)

Most portfolio managers were once Could be a lonely work environment with lots of
in research. time in front of the computer, especially at
a smaller rm
Gain industry expertise
Repetitive assignments

Pays well
Signicant data work

Typically a collegial environment

Top performers are promoted without going

to business school.

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T TIV T I T
ont give up if one of the positions discussed a ove isnt availa le for youthese are dif cult o s
to get. If you are having no luck getting positions with portfolio management or investment research
teams, there are many other alternatives to pursue that will etter position you to reapply with only a
year or two of additional experience. elow are descriptions of some of the est options to consider.

acco n nd od c n e en n :
ecause sales and marketing professionals are typically re uired to e uent in all of the investment
products, these positions create a great opportunity to learn a out the various investment styles that
clients demand. This area is also a great career opportunity for those interested in asset management
ut dont want to e the investment decision maker more a out this later . If your goal is to use
sales and marketing as a stepping stone to the investment side, make a point to network early on
with investment professionals, prove yourself at your current o efore you make it known that you
want to make the switch and work toward developing the uantitative skills needed for the investment
positions.

sell de n e en e e c :
any uy side investment professionals come from the sell side. It is a great place to learn to
do analysis, generate nancial models and construct investment reports. The uantitative skills
and knowledge of the overall investment usiness makes former sell side people desira le to asset
management rms.

in e en con l n :
These are the rms that advise institutions and high net worth investors on appropriate diversi cation
strategies and which asset managers to hire. t the entry level you will assist on manager searches
and data collection for multiple investment styles. It is a good introduction to the different rms and
the dynamics of the industry as a whole.

T ke ec e ed n nc l n l f a e :
This is a three part exam that tests your knowledge in nancial accounting, statistics, investment
analysis, economics and ethics, among other su ects. The exam is offered in ecem er and une
for evel I and in une for evels II and III. The is ecoming a standard for the industry and many
people egin the process prior to even entering the industry. It is not a prere uisite to getting an
investment o , ut working toward achieving it can certainly give you a leg up on your peers, especially
pre candidates, as it shows commitment and dedication to a career in the investment industry.

74 2014 V . ,i .
M ke n s le nd e on
Chapter 9

Increasingly, as the industry grows and matures, investment management companies are focussing
more on professional marketing and sales as a point of differentiationespecially on the institutional
side of the usiness. Traditionally, marketing and sales were more or less an afterthought, and a lot
of the marketing and sales work was performed y investment professionals. s the industry has
grown, a new reed of investment professional has een orne to actively pursue these roles they
are known as account managers and product managers and they serve the sales and marketing
functions in investment management rms. elow is a road description of the positions that exist
in the institutional marketing and sales segment.

T T
ccount and product managers are responsi le for identifying new clients, presenting the rms
investment capa ilities to new and existing clients, solidifying new relationships, servicing existing
clients and acting as liaisons etween the product and the client. s was previously discussed,
institutional clients are demanding. ortfolio managers used to serve many of these roles. owever,
clients ecame more sophisticated and demanding, and often turn to investment consultants to
conduct signi cant due diligence. To keep portfolio managers focussed on picking stocks and onds,
the advent for roles to meet these client needs has risen.

The search process for eing selected to manage an institutions assets is rigorous and lengthy
it could take up to several years. sset managers make several presentations, and institutions
conduct extensive due diligence. nce an investment management rm is hired, the account and
product managers serve in a client relationship capacity. In this role, they arrange semiannual
portfolio reviews, prepare presentations and assure that the proper reporting procedures are followed.
urthermore, managers work to roaden client relationships y introducing institutions to additional
investment products offered y the rm. To do this, account managers must e constantly aware of
their clients needs. They do this y reading current news a out their clients and meeting with them
on a regular asis. dditionally, product managers educate themselves on the various products that
clients might e interested in. This is where the product managers come in fter account managers
identify a clients product need, product managers will determine how est to present the product to
the client. They typically have a greater in depth knowledge of the products strategy, performance
and holdings than account managers and can articulate this to the client.

ccount and product managers are graduates or those with e uivalent experience. Increasingly,
many of these managers are ac uiring degrees as client sophistication has increased.

75
V c G i v m g ,e e
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T T I T
roduct management associates assist in creating portfolio review presentations and in developing
promotional presentations for potential new clients. They analyse the current market, focusing on
investor demand and trends. They often analyse competing products and develop marketing tools to
promote and differentiate their particular product. roduct management associates are traditionally
segmented y investment product type such as e uity or xed income. ome product managers focus
on only one speci c product type such as a large cap e uity portfolio or short duration ond portfolio.

roduct management associates are typically graduates. They often work with college graduates
who serve as analysts on the product management team.

T T I T
ccount management associates assist in answering re uest for proposals s issued y institutions
seeking to hire new investment managers. dditionally, associates assist senior client servicing
of cials in maintaining and expanding client relationships. ccount management associates are
traditionally segmented y client typepu lic pension funds, corporate pension funds, endowments
and foundations.

ccount management associates are typically graduates. They often work with college graduates
who serve as analysts on the account management team.

TI I I T
arketing specialists are typically postgraduates, not necessarily with nance related degrees. They
are responsi le for marketing different products to potential clients, as well as eing a point of contact
for current clients. large part of the o involves formulating presentations to give to potential clients,
as well as maintaining the accuracy of presented data.

ccording to a marketing specialist at chroders, To succeed in this role you have to e commercially
aware. nderstanding what is happening in the markets and how this relates to the products we offer
and how they are sold is crucial. ttention to detail is also very important oth to our clients and to
regulators.

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acco n od c n e en oc e nd
ke n ec l o ndcon
po on

Broad knowledge of all of the investment Difcult to jump to the investment side
products in the marketplace

Great professional atmosphere for people Limited focus on building quantitative skills
that like the industry, but dont want to be
the investment decision maker

Less hierarchical career path than the Repetitive assignments

investment side

More entry-level jobs than the Too many presentations

investment side

Lots of client interaction

I T
usiness analyst is the meeting point for the front of house and ack of ce staff. large part of
the role involves understanding the needs of the front of house staff and implementing this on the
technical side. They may process changes, maintain existing trading systems and investigate other
systems that could e of ene t to the organisation. s a result due diligence is also a ma or part of
the o . If the usiness side wants something implemented, the usiness analyst will investigate the
risks and pitfalls involved.

I T
The risk analyst position is perhaps closest to the stereotypical role of asset management employees
as num er crunchers. risk analyst will look at the organisations trades, what is happening in the
market and ascertain the associated risk and exposure. This involves crunching a lot of num ers to
see whether or not investments might work. eal risk analysts will evaluate risk levels and price them
into a deal structure in essence, ensuring the fund doesnt pay over the odds for a deal that may
encounter some pro lems. isk analysts, normally employed in portfolio analysis, will normally focus
on one industry or sector, such as real estate.

V V .v . , x v ,
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V c G i v m g ,e e
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T V
The role of systems developer varies greatly depending on the department they are employed in.
ystems developers in one department may e responsi le for the maintenance of one system
speci cally assigned to them. They ensure the system is running smoothly, x any errors and look for
any updates or developments. In another department, such as architecture and innovations groups
that most ig rms have, they may analyse a variety of new systems and technologies to nd anything
they think could aid the usiness. They will then carry out a proof of concept pro ect, comparing
the new systems and technologies with existing ones.

ne n l k n l nd e de elo e o ndcon
po on

r g n w -
w

o v w k- s g v g g k w w

m x - - , p g v k
w g

c c v ( ) v
- -
c gw w

78 2014 V . ,i .
 n e e
Chapter 10

In this chapter, we take a look at some typical days in the life of the investment management
professionals with whom we spoke.

I V T T T T I I I
eo E lo ee: ophie arnshaw
eo E lo e : aillie ifford
oc on c : din urgh
T le:Investment anager
e en on: merging arkets
e o e f : our years
e o e n en r ole: ess than one year
e ee : asters in nglish iterature, hil in ighteenth entury and omantic iterature

A
o ole
I am currently working as an analyst in the merging arkets team. y primary areas of coverage
include hina and . I am tasked with carrying out research on companies which operate in
these regions, drawing conclusions from this research, and presenting my recommendations to the
team and to the rms other analysts and investment managers. This research can either e a out
existing emerging market holdings or new potential uy ideas.

e e n o o o
The est thing a out my o is that I am continually learning! s part of my research, I may end up
delving into the competitive dynamics of the auto market in hina, technological trends in large si ed
atteries for energy storage, or economic or political developments in the region.

e o c llen n n o o o
iven that we are investing on a year time hori on, the lag etween my stock recommendation and
the outcome of that recommendation is signi cant. This lack of timely feed ack makes it dif cult to
learn from ones mistakes and to monitor ones progress.

e e c led c on e e en
aillie ifford re uires that you have a degree in order to oin the graduate investment program
ut is not prescriptive as to the discipline. ur investors come from a wide variety of ackgrounds,
which I think is de nitely a positive as it allows for well rounded, well informed de ates and decision
making.

How ele n o ed c on o e ole

y arts ackground has helped me hone my analytical and research skills, oth of which are critical
to investment analysis. s part of my degree, I developed the a ility to sift through large uantities of

79
V c G i v m g ,e e
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Aday in my life at Baillie ifford

: : et ready and leave for the office a out a.m. I walk to work and usually
arrive around a.m.

: : at reakfast, get a coffee from the canteen, check emails. y first task of the
day is to check up on ma or news flow in emerging markets. I tend to get my company
specific news from euters nowledge and loom erg. We have a weekly news meeting
where significant news flow from the team is collated and discussed.

: : The ma ority of my day is spent working on company specific research reports.

This involves ackground reading on the company, working through the financial reports,
thinking a out the growth opportunity, the companys competitive advantage or lack
thereof, management and how they are incentivi ed, and finally valuation. y information
sources typically include speaking to management, competitors, suppliers, customers,
industry experts, and reading trade ournals and logs. nother important source of
information is my colleagues at aillie ifford who have a myriad of experience and
knowledge on a wide variety of su ects and companies.

: : at lunch. Ill either eat at my desk or go out for lunch with colleagues.

: : ost of my afternoon is spent continuing company specific research. In

addition, I may present stock recommendations to the team at our weekly stock discussion
meeting or to other teams within the firm. I may also take a meeting with company
management at our aillie ifford offices. These meetings normally take an hour.

: : ost nights I manage to finish at p.m. I then go kick oxing!

information, identify what was important, and form well constructed, logical arguments on the ack
of this. y degree also enhanced my a ility to articulate complex ideas simply, and to de ate those
ideas con dently.

an d ce o d e look n c ee n n e en n e en
e willing to construct an argument as part of the interview process and defend that argument when
put under pressure. In this career, there are very few right answers. ead widely, e in uisitive, and
willing to learn!

o o e e k
aving the freedom to set my own agenda, excellent work life alance no all nighters! , a non
hierarchical working environment

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I V T T T T
eo E lo ee: atherine lmore
eo E lo e : lack ock
oc on c : ondon
T le: ixed Income nalyst
e en on:Investments
e o e f : years
e o e n en r ole: years
e ee : c ctuarial cience

A
o ole
I work within the Investments group at lack ock. y department, International ixed Income I I ,
is responsi le for investing in ixed Income securities for lack ocks Institutional and etail clients
we have over n of assets under management. y role varies and includes working closely with
ortfolio anagers and our lient ervices teams, having a deep understanding of the ixed Income
markets and glo al economies so as to communicate with our clients on current market conditions
and the resulting impact on their portfolios. I am also involved with preparing pitches for new ixed
Income usiness, as well as assisting senior mem ers of the team with meetings with existing ixed
Income clients.

e e n o o o
The est aspect of my o is the variety every day is different and comes with exciting new challenges.
Working on the trading oor provides a stimulating and fast paced environment in which to work,
and one I thoroughly en oy. I am involved with a wide range of markets, from developed through to
emerging economies. I have the opportunity to work closely with senior investors and to hear their
views on the markets. This range and exposure allows me the opportunity to enhance my knowledge
and add value to my team y contri uting my own views to discussions.

e o c llen n n o o o
or me, understanding the complexity of the nancial markets can feel like a steep learning curve at
rst. owever, this challenge has allowed me to continually improve y reading research and keeping
up to date with the latest economic news. lack ock encourages and cultivates an in uisitive culture
where team mem ers are willing and happy to help with any uestions.

e e c led c on e e en
or the vast ma ority of I I roles, an excellent academic ackground is expected ut no set of su ects
are looked forin fact lack ock actively seeks diversity and encourages applications from a range
of disciplines, universities and ackgrounds. reating teams comprised of different ackgrounds is
important to the success of the teams, here. evelopment continues when you oin the completion
of the Investment anagement erti cate is mandatory and many of the analysts complete the
Institute uali cation once in the role, this is on top of internal training opportunities.

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V c G i v m g ,e e
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How ele n o ed c on o e ole

oncepts learned at university gave me a good ase from which to uild upon oining lack ock,
furthermore an understanding of economics can e helpful. owever, lackrocks analyst program
provides extensive training, and completion of the Investment anagement erti cate, coupled with
on the o training has een key in understanding the role. What I learned is important, ut what I
learned a out how to learn is what helps me in my careerso having a passion a out your su ect,
whatever it is, is very important.

Aday in my life at Blac oc etail lient Businesses

: rrive at the office.

very morning I review the market open and any relevant news. When working with clients
it is important to keep track of market movements and the impact that developments may
have on strategies recommended to clients.
I also review the agenda for the day client meetings, conference calls, internal meetings
and key clients that I want to contact throughout the day to follow up on prior conversations,
discuss usiness and explore any potential new opportunities .
nce all the prep work is done, its time to get started!

: very onday morning we meet as a team to discuss last weeks activity and set a
plan and strategy for the upcoming week. Typically we share agendas, success stories,
any issues outstanding, progress on strategic initiatives and draft a list of action points to
complete throughout the week.

: y this time we are good to go. I tend to prefer client meetings in the morning as it
allows me to have the afternoon to follow up and catch up on incoming ueries. I typically
meet with clients for hrs and cover a range on topics from updates on their current
positions with us to discussions around markets and specific opportunities.

: Time to head ack to the office, uick lunch and catch up on email traffic.

: Work through incoming ueries, prioriti ing and moving these towards resolution
completion. I will also review trades and analy e trends for the day.

: Time to call clients! The next two hours will e spent calling clients, following up
on discussions, catching up on usiness and discussing new opportunities. It is important
to remain vocal and close to clients, nurturing and uilding relationships. n integral part
of uilding relationships is through regular contact personal communication.

: atch up on in ound ueries throughout the afternoon and work through emails to
follow up on conversations opportunities.

: repare for the next day.

: eave the office in time to catch up with friends, gra a ite or play some sport.

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an d ce o d e look n c ee n l ckr ock

or those considering a career in investment management, I would advise keeping up to date with
glo al economic and political events. I would also suggest gaining some relevant work experience in
the nancial industry and if possi le, in investment management this will e invalua le in determining
which area is of interest. Investment anagement is very different to other areas of inance, such
as anking or rivate uitythey re uire different skills and are different environments, so it is
important you know what you are applying for and genuinely want it.

o o e e k
lack ocks analyst program egins with an induction at the rms head uarters in ew ork. uring
the time in ew ork, lack ocks founders spoke to the analyst class it was inspiring to hear from
the people who uilt the rm and are still shaping it today. urthermore, meeting the other analysts
has meant that I know people in many areas of the rm which has een hugely helpful in gaining a
etter understanding of the wider usiness.

There is a culture of communication and innovation in our team we are encouraged to speak up and
e proud of what we do. The environment I work in is a very lively and en oya le one.

TI T T
I IT W WI I V T T
eo E lo ee: ayley tkin
eo E lo e : idelity Worldwide Investment
oc on c : ondon
T le: ssociate
e en on: uropean eal state
e o e f : years
e o e n en r ole: weeks
e ee : ons rench and usiness tudies

Q&a
o ole
I am currently in my third rotation of the two and a half year uropean ales and arketing graduate
programme. y rst rotation was a marketing role in the ersonal Investing team and I was
fortunate to oin the team at a very exciting time as they were ust a out to em ark on a ma or usiness
relaunch. I worked in high pro le pro ects with senior management, giving me exposure to many
different areas of the company. ollowing the relaunch, my role focused on managing marketing
campaigns and driving forward new usiness propositions. I spent my second rotation in idelitys
rankfurt of ce working in the roduct and arket team. This role was signi cantly different to my
rst, not only was I working in a different country and market, I was also much closer to the investment
side of the company and worked across the wholesale, retail and institutional channels. I supported
many large scale pro ects where I worked closely with other ontinental uropean teams, helped
launch a new fund, coordinated sales training and organi ed idelitys iggest sales event of the year

V V .v . , x v ,
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where over employees from different markets attended. I recently oined the uropean eal
state team ased in ondon. I work in a com ined sales and marketing role, which involves preparing
materials for client meetings, responding to s, supporting sales pitches and responding to client
re uests. I also work closely with the eal state perations and esearch teams y supporting them
with any on going pro ects.

e e n o o o
The est thing has to e the exi ility to work across a range of markets and usiness areas. In ust
over a year of working at idelity, I have worked across areas of usiness, in roles and in different
markets. Through working in such varied roles, you have the opportunity to meet interesting people
across the usiness and work in a range of different pro ects.

e o c llen n n o o o
hanging roles every year to months is the most challenging element of the programme. very
role you start is signi cantly different to your previous rotation and you are expected to get up to
speed uickly. I found this especially challenging when I rst oined the roduct and arket team
in rankfurt, I had to ad ust to a new language and culture as well as take on a new role. owever I
elieve this challenge is crucial to my development and overcoming it is an asset going forward.

Aday in my life at idelity orld ide Investment

: I tend to arrive efore as I like to have my reakfast and coffee whilst catching
up on emails.

: dd latest property opportunities in our data ase. nce a week we will

review the latest opportunities as a team to understand those that are of interest and what
is going on in the market.

: nswer any re uests from our institutional team. ost of the time, they are
looking for our latest performance data to update clients.

unch. I usually use this time to catch up on my I revision or if the

weather is good I will go on a run!

: I spend my afternoons focusing on client presentations and s or

preparing for pitches. This type of work usually involves gathering data from various
sources. very presentation is different depending on the client or consultant, most of the
time the presentations focus on our funds and performance, in other instances they focus
purely on the eal state market.

Work through emails to follow up on conversations and prepare for the

next day.

: Time to leave the office and catch up with friends or head to the gym.

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e e c led c on e e en
ou should have or e on target for a degree. revious work experience is very important and the
a ility to speak several uropean languages puts you at a clear advantage. idelity also encourages
you to complete some foundation level uali cations soon after you oin. I am currently in the process
of completing my I and have the opportunity to do the .

How ele n o ed c on o e ole

idelity takes on graduates with a range of ackgrounds and degrees. I did not study nance and did
not feel in any way disadvantaged y it. I elieve y not having much of a nancial ackground, I was
a le to ring fresh ideas and different thinking to the various roles I have done.

an d ce o d e look n c ee n le nd ke n f del
ou need to e am itious and always e willing to go that extra mile. dapta ility and exi ility are
also key assets as well as the a ility to uild strong relationships.

o o e e k
The opportunity to live and work in a different country. I had a fantastic months living in rankfurt,
I was a le to meet many new people as well as discover a new city and culture.

I V T T T , I V T T
T T
eo E lo ee: aniela ocior a
eo E lo e : Investment anagement td
oc on c : ondon
T le:Investment raduate
e en on: otational rogramme
e o e f : year
e ee : c istinction inance and Investments, c istinction International usiness
dministration, otterdam chool of anagement, rasmus niversity

A
o ole
The Investment raduate scheme lasts etween months, during which the graduates rotate
across various usiness areas, including ixed Income, uities, rudential apital and . y
rst rotations, each lasting weeks, were in uities orporate overnance and rudential
apital rincipal inance . ollowing these, I am now rotating in the e t estructuring team within
ixed Income. I am involved in oth the origination and execution of two different deals. This largely
includes in depth due diligence of a companies fundamentals and its industry, with the purpose of
understanding the reason of what rought the company to a distress. I then incorporate those in the
pro ections of the companys future operational and nancial performance after restructuring.

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Howd d o dec de oen e o nd

rom the early stage of my university studies I knew that I would like to pursue a career in nance.
I knew that I was particularly interested in the areas of Investment anagement and Investment
anking. aving done internships in oth Investment anking and Investment anagement I have
developed a preference towards Investment anagement. I was attracted to it ecause of the
readth of knowledge that you are exposed to, signi cant responsi ility from the early stages, and
the uni ue involvement in the usiness world you get as an investor, while eing a le to maintain a
healthy work life alance at the same time.

e e c led c on e e en
re uires that a candidate has a minimum degree or e uivalent, and a minimum of
points or e uivalent scheme dependent . The candidate does not necessarily need to come
from a relevant academic ackground employs people from very diverse disciplines. In addition
to the minimum educational re uirement, the genuine interest in the asset management industry and
nancial markets is of crucial importance.

Aday in my life at M Investment Management td

: Wake up and get ready to leave at a out . .

: rrive at the office and gra reakfast from the office canteen. I start the day y
checking emails and reading the news..

: The schedule of the day differs for every rotation. ut what all of the
rotations have in common is that you usually work on several pro ects in the same time,
which re uires managing time efficiently. lso, the day would generally look different
depending on whether there is a live deal happening at the moment or the team is in the
process of searching for a new deal. If the team is the period etween deals, most of the
day will involve the search for potential deals through research and internal discussions.
When we are in the middle of the deal, most of the time is dedicated to its analysis and
implementation. t the moment, I start my day in e t estructuring team y performing
due diligence and financial modelling of the deals we are currently involved in. This usually
involves an in depth analysis of the company, its market, its past financial performance,
and its future financial pro ections.

: I usually gra lunch at the canteen with the other graduates.

: ost of the deal related calls and meetings are happening in the afternoon.
lso in the afternoon, I spend some time working on another pro ect, which involves the
analysis of the fund performance and the pro ections of its cash flows.

: I usually manage to finish around . urrently, in preparation for the evel

I examination, I stay at work for a couple more hours till . . to study.

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How ele n o ed c on o e ole

I elieve that my degrees in International usiness dministration and inance and Investments
provided me with the necessary theoretical ackground re uired for a role in Investment anagement.
Industry practices, however, may differ from academic theories taught in the university. Therefore,
in my opinion, it is the on the o training and peer support that helps graduates succeed at their
roles at . In addition, provides graduates with comprehensive ve week training at the
eginning of the scheme, which focuses oth on soft skills and on understanding of the relevant
technical concepts.

k ll e o n o cce
In my opinion, the most important success factor at is eing passionate a out your role and
en oying the o that you are doing. In other words, it is important to e curious a out the nancial
markets and e eager to learn. aving strong analytical and pro lem solving skills helps in learning
the new concepts at a faster pace. t , you need to e a le to see the ig picture, ut also take
smaller details in consideration, which greatly contri utes to the uality of the work that you produce.
astly, the a ility to carry out the work independently is ecoming particularly useful during the usy
periods.

e e n o o o
The rotations within the Investment raduate scheme provide me with a great opportunity to gain in
depth exposure to different departments at Investments. What I nd especially exciting a out
the rotational program is the feeling of involvement in the team from the rst very day driven y the
responsi ilities given to you. In addition to that, uilding up a network of contacts at such an early
stage of the career is a very valua le ene t that you get efore settling in a permanent role. nd,
undou tedly, the people here are what make a very attractive place to work for. rom unior to
senior, they are very approacha le, supportive, always open for uestions and ready to help.

e o c llen n n o o o
tarting a new rotation every weeks feels like starting a new o , which involves getting to know
new team mem ers, and learning new concepts and operational principles. lthough this is what
makes the raduate cheme uni ue, those transitions might re uire some effort, especially in the
eginning of the rotation. oreover, while rotating across different departments, you gain exposure
to many different industries. ost of the industries have their uni ue characteristics, metrics and
speci c details that graduates need to have a good understanding of. verall, however, these
challenges are what make the work at so diverse, dynamic, and with a very steep learning
curve.

o o e e k
What I especially like a out my o at is the signi cant exposure to and interaction with senior
professionals oth from and from the companies that we invest in at such an early stage of
my career. lthough the work re uires concentration and time commitment, offers a very good
work life alance, which leaves evenings and weekends free for ho ies. egular team lunches
dinners are another great thing a out , which gives a really good opportunity to get to know your
team mem ers in an informal environment.

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I T T ,
I V T T T T
eo E lo ee: avide ndaloro
eo E lo e : Investment anagement td
oc on c : ondon
T le: ommercial raduate
e en on: otational rogramme
e o e f : year
e ee : c istinction in conomics and anagement of Innovation and Technology, c
istinction in anagement of Innovation and usiness evelopment

A
o ole
The ommercial anagement scheme lasts etween to months and involves a series of three
month placements. I am currently rotating in the trategy team, within etail. fter completing
the rst six weeks of intensive training graduates rotate through the following usiness areas uities,
etail, roup perations, ixed Income and rudential apital.

Howd d o dec de oen e o nd

In my view, we are experiencing the most interesting years in the asset management industry to
date. I elieve that there have een more changes within the industry in the past few years than
in the previous . hange spurs learning. Whats more, the industry is ecoming more and more
important for the future of all of us. It is extremely interesting to see how fast the industry is evolving
and it is exciting to e an active part of this change. Investors ehavioural patterns are ad usting to the
economic and market climate. ore volatile markets can contri ute to more unpredicta le fund sales
and higher concentration of sales ows in a narrower array of funds. rom a regulatory standpoint,
there is the need to increase transparency and communication re uirements to help investors make
more informed decisions. sset management companies like are called to cope with all these
challenges and many more, and this constitutes, to my eyes, a powerful driver to work in this industry.

e e c led c on e e en
t we have people oining us from very diverse disciplines, however what unites them all is an
interest in the asset management industry.

dditionally, the ideal candidate for will have

inimum degree or e uivalent or an expectation thereof .

inimum of points or e uivalent est three grades only .

How ele n o ed c on o e ole

y economics ackground has provided me with analytical and research skills, which are incredi ly
useful for my day to day activities. urthermore my previous experiences as a research assistant and
a consultant have certainly een ene cial.

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k ll e o n o cce
I do not elieve in an easy recipe for success. In general, I elieve that exi ility, pro lem solving
skills and attention to detail are three of the most important ingredients. uality is also important, and
that is what differentiates a good o from a truly excellent one. inally, ecause uality is often time
consuming, time management skills are also vital. It is a long ourney to get there!

e e n o o o
I personally think that the est thing a out this rotation programme is the enormous learning opportunity
that it rings. y working with different teams and divisions you develop a great understanding of the
usiness from all angles. urthermore it allows you to uild a great network of contacts throughout
the organisation.

e o c llen n n o o o
It is certainly not easy to have to settle down every two three months. While starting a new rotation
is undou tedly one of the main ene ts of the programme, it also re uires a great deal of mental

Aday in my life at M Investment Management td

:Wake up, eat some reakfast and get ready to leave at a out . .

:I usually walk to work and normally manage to arrive around . . fter gra ing a
coffee from the canteen, I start my day y checking e mails and reading the news.

: There is no routine here and the activities are generally varied and rotation
specific to some extent. I personally think that this is an extremely interesting feature of
the programme as it helps to develop multitasking skills from day one. n a daily asis, I
generally spend a su stantial amount of time in meetings, either with other teams inside
or occasionally with external clients. esides meetings, I usually carry out activities
like market analysis, competitor analysis, fund and data analysis, study industry trends
and write presentations often on ehalf of senior managers.

: unch time. I generally gra some food from the canteen and tend to eat
at my desk while catching up with emails, news or the activities I started in the morning.
In relatively relaxed days I eat with my team or with other colleagues, sometimes outside,
and when the weather is nice we tend to eat y the river side, only one minute walk from
the office.

: In the afternoon, I usually spend my time etween meeting rooms and my

desk, where I keep working on the pro ects I have een assigned to.

: I usually tend to spend this time catching up with emails and ust efore
leaving I always write a draft of my to do list for the following day. I normally manage to
finish around . . , so I have a lot of time to en oy after work. efore going ack
home to rest I like to do some sport or to catch up with friends.

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exi ility new division, new colleagues, new work and new dynamics. urthermore, graduates need
to make a genuine contri ution to their teams from a very early stage. ll this is challenging, ut for
those who en oy challenges, I can assure you that this is fun as well.

o o e e k
s corporate culture is extremely friendly. It is very easy to make new contacts and to strengthen
your network. lthough this may sound like a clich, everyone is very supportive and keen to help,
no matter how senior.

T T
eo E lo ee: ichael evereux
eo E lo e : chroder Investment anagement
oc on c : ondon
T le: raduate trainee
e en on: ulti-Asset
e o e f :
e o e n en r ole:
e ee : c conomics, and c inance, Imperial ollege usiness chool

A
o ole
I work as a graduate trainee within the multi asset investment team.

Howd d o dec de oen e o nd

I did a summer internship in the e uity research division of an investment ank during my time there
I was disappointed with the short term nature and partiality of research conducted there. oining
the asset management industry allows me to conduct investment research ut in a more impartial,
meaningful manner.

e e n o o o
very day rings different news and different investment ideas to properly challenge your thinking, and
I very much en oy working in an environment with very intelligent, yet friendly people.

e o c llen n n o o o
The fact that all our investment ideas are ased on speculation a out the future, so you have to a make
a decision with no guarantee that things will work out as you hope they will.

e e c led c on e e en
t least a from a top university. u ect choices vary ut numerical skills are important.

How ele n o ed c on o e ole

conomics has de nitely helped me in developing a framework to understand what is happening in
the glo al economy. It is dif cult to link together disparate events that seemingly have no relation, and

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economics allows me to try and piece together chains of events that impact asset prices. The masters
in nance was educational in helping me understand nancial theory and learning a out different
aspects of the industry.

k ll nd o e e ence e o n o cce
Tenacity is de nitely re uired to understand what is going on in nancial markets and conduct
thorough analyses often the answer is not uite one thing or the other, ut a com ination of factors.
n open mind would e useful as often you will nd many differing opinions on the same topic, and
you cant ust re ect each idea efore thinking it through! I would also say strong communication
skills are helpful in getting your point across effectively to colleagues and to e a le to argue an
investment case.

e c lc ee n o nd
sually a graduate trainee like me will have to make a decision at some point whether to stay eing
a research analyst or ecome a portfolio manager. portfolio manager is a ig step up from ust
researching investment ideas, as you will e directly responsi le for clients money which is a whole
different world! n the other hand staying as a research analyst you will e a le to focus on ust
generating actiona le strategies for the portfolio managers.

o o e o o o
I get a lot of time to read sell side research and conduct my own side pro ects to test ideas which is
nice as I try to develop an independent viewpoint , ut I also get the opportunity to interact with people
inside and outside the rm fre uently, which keeps things lively.

Aday in my life at chroders

:Wake up.

Walk into the office, log in to my and open up icrosoft utlook and
loom erg. heck what happened in various financial markets overnight, various
portfolios that the team runs and read various its of roker research news.

: ra reakfast from the canteen.

: y work can e fairly ad hoc sometimes there are sell side research analyst
calls or presentations which I attend, or there are ideas that portfolio managers are
interested in that I will work on. If there is no work from the portfolio managers I get started
on my own pro ects.

op out for a uick lunch with someone on the grad programme or in my

team.

: ead the T, catch up with colleagues in the economics team and work on
various pro ects do meetings as part of the various research teams in multi asset.

: fter work Ill head to the gym or go for drinks with friends colleagues.

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o le o e o o o
When you dont understand an idea, due to its complexity or specialisation its not always possi le to
ask someone for help sometimes you ust have to gure things out on your own!

an d ce o d e look n c ee n n e en n e en
ake sure you really understand what eing on the uy side is like too often people dont see a
distinction etween uy side and sell side when in fact asset managers operate uite differently from
ankers in mergers ac uisitions or sales trading.

o o e e k
ree gym in the of ce is a ig plus! ood work life alance also is a great ene t and colleagues here
are incredi ly friendly.

T T
eo E lo ee: atie reen
eo E lo e : chroders
oc on c : ondon
T le: raduate trainee analyst trategic olutions
e en on: Institutional sales and marketing istri ution
e o e f :
e o e n en r ole:
e ee : c conomics and hilosophy, ondon chool of conomics and olitical cience

A
o ole
I am a graduate trainee analyst in the trategic olutions team, which is part of Institutional sales
marketing.

Howd d o dec de oen e o nd

chroders came to give a presentation at my university. sset management was an area I had not
considered efore, ut after completing a summer internship at the company, I decided to apply for
the graduate programme.

e e n o o o
eeing the end result. Whether working on market analysis or a client presentation, I can always see
the value in the work Im doing. The work is extremely varied ut my team is very supportive and
colleagues always have time to chat things through if Im unsure.

The graduate programme also gives you a great network. We see each other regularly in our
classes and also for lunch or drinks outside work.

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e o c llen n n o o o
y team devises solutions for a wide range of clients, so the work we do is always different and each
client presents a new challenge. The answer is never o vious pro lem solving and thinking outside
the ox is essential.

We also study for the exams whilst working, so uggling work on the desk and revision can
sometimes e dif cult.

e e c led c on e e en
ost graduate schemes re uire a . or a ove. raduates come from a variety of different degree
disciplines and we are given excellent training in investment throughout the programme, so a nance
related degree is not essential.

How ele n o ed c on o e ole

lthough the su ect matter is different, the skills I uilt up at university are extremely relevant.
umerical skills are crucial for the analysis my team does. owever, we also produce a num er of
research papers, so I found having an element of essay writing in my degree very useful.

k ll nd o e e ence e o n o cce
nterpersonal s ills and being able to wor with others is ey, no matter where you wor in the
business. nternships and other wor e perience can also provide a good insight into the industry,
whilst helping you build up professional s ills that will be invaluable in your future career.

e c lc ee n o nd
raduates at chroders are given a fast-trac induction to the investment management industry.
tudying for and A e ams is a great academic grounding while being placed in a team
straight away lets you get involved from day one.

n istribution sales mar eting , people come from a variety of career bac grounds so there is
almost no typical career path. he graduate scheme is a great spring board and the uali cations
and s ills are a sound base for any career path which youre passionate about.

o o e o o o
or ing with a huge range of people. istribution is a client-focused function so being a people
person is ey in building strong internal and e ternal relationships. ou have to be able to see the
clients point of view as well as chroders.

o le o e o o o
evision time can be stressful but other raduate trainees are in the same boat so theres always
someone to moan to.

an d ce o d e look n c ee n n e en n e en
e open-minded. any graduates thin a career in investment management means wor ing on an
investment des but there are a whole host of different roles including sales, business development,
nance or . hin about your strengths and remember that other s ills, such as communication
and problem solving, can be ust as important as academic uali cations.

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o o e e k
he wor life balance wor with a great group of people and everyone nows when to wor hard
and when to head to the pub.

Aday in my life at chroders

:Wake up.

: rrive at my desk. I usually use this time to check emails and organise my
work for the day.

: Team meeting. We have regular meetings to go over our work flow. This keeps
everyone in the loop and gives anyone a chance to flag issues and ounce ideas off the
team.

: odelling and analysis. I like to do any numerical work in the mornings when
Im fresh. We often use loom erg and our xcel models to help devise strategies for our
clients.

: atch up. I have monthly catch ups with a few people around the usiness,
particularly on the investment desks. In istri ution, its important for us to e aware of
the ideas and issues in Investment so were all on the same page.

: unch time. I tend to gra lunch with some of my fellow graduates. We all
keep in touch and regularly go for lunch or post work drinks.

: resentation. s part of my development, I often do presentations to my

team and others as a way of working on my client presentation skills. This might e on
developments in the market or a piece of research Ive een doing.

: esearch. Im usually working on at least one academic paper that my team

produce. I have to spend time researching and writing these and will then talk through
with the rest of my team to get feed ack and a different perspective.

: I usually look over tomorrows meetings efore heading out for a drink with
friends.

94 2014 V . ,i .
THE
s
appEp i
ault areer
uide touide
Investment
to Investment
Ban ingManagement, European Edition

Glossary
b - v .s -
Valuing
f ar Companyb k w
t c a m g
i v s
glo

T
ac e n e o : ses availa le information and forecasting techni ues to seek a etter performance
than a portfolio that is simply diversi ed roadly.

a e : conomic resources owned y a rm that are likely to produce future economic ene ts and
are measura le with a reasona le degree of certainty. xamples include cash, accounts receiva le
and inventory.

l nce ee : tates the rms assets and how they are nanced. Includes sections on assets,
lia ilities and shareholders e uity.

de: The asset management rms that represent individuals and institutional investors.

le end e : xpenditures to ac uire long term assets.

f ae : three part exam that tests your knowledge in nancial accounting, statistics, investment
analysis, economic, ethics, etc. The exam is offered in une and ecem er for evel I and is taken
over the course of three years.

lo e end n e en nd : closed end fund is an investment company that is pu licly traded. It

raises a xed amount of capital through an initial pu lic offering. The fund is then structured, listed
and traded like a stock on a stock exchange.

o o c l : pportunity cost of funds invested in a usiness the rate of return that rational
owners re uire an asset to earn efore they will devote that asset to a particular purpose. nalysts
often measure the cost of capital y taking a weighted average of a rms de t and various e uity
securities.

e ec on: The reduction in the ook or market value of an asset. It is also the portion of an
investment that can e deducted from taxa le income. or example, a piece of e uipments value
is depreciated each year as its useful life declines.

n : ot getting the o . The call you get after the interview that says, Thank you, ut

dend: ayment y a company to its stockholders.

E c n e ded nd: portfolio that can e ought on the stock exchange and costs much less
than a traditional investment management rm.

f ed nco e: The opposite of e uity. ixed income investors invest in the onds or de t of a
government or corporation.

g ow ock: haracterised as industry leaders that investors elieve will continue to prosper and
exceed expectations. These companies have a ove average revenue and earnings growth and their
stocks trade at high price to earnings and price to ook ratios. Technology and telecommunications
companies such as icrosoft and isco are good examples of traditional growth stocks.

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Hed e nd: These funds are managed y aggressive investment managers, using strategies such as
leverage, long, short and derivative positions in oth domestic and international markets. The goal is
to generate high returns, regardless of how long they hold on to a stock.

inco e e en : escri es the companys operating performance over a period of time.

in l l co e n ip : companys rst pu lic issue of common stock.

l : conomic o ligations of a rm arising from ene ts received in the past that are re uired
to e met with a reasona le degree of certainty and within a reasona ly well de ned period of time.
xamples include accounts paya le and salaries paya le.

M ke c l on: companys value assigned y the stock market. It is the product of the
current stock price and the shares outstanding in the market. Investment products are often classi ed
y the level of market capitalisation that they invest in i.e., large capitalisation funds typically only uy
stocks with greater than . illion in market capitalisation .

M l e l nd: retail fund comprised of stocks is sold to investors through anks and rokerages,
and is registered with regulators.

M l nd e ke : ade popular y harles chwa . It is a common distri ution source

that offers hundreds of different mutual fund products to individual investors.

p e n e o : elies on diversi cation to match the performance of some stock market index.
ecause a passive portfolio strategy involves matching some stock market index, this strategy is
commonly referred to as indexing.

p e en l e: iscounted value of future cash ows.

p eE : Investment companies that conduct uyouts of pu lic companies to take them private.
The plan is to delist them, reorganise, and ring them pu lic again after they have een reorganised.

r e e o o o l r f p : tatement issued y institutions i.e., pension funds or corporate

retirement plans when they are looking to hire a new investment manager. Typically details the style
of money management re uired and the types of credentials needed.

sell de:The functions of an investment ank, which includes investment ankers, traders and
research analysts. These sell side professionals issue, recommend, trade and sell securities to the
investors on the uy side.

s e olde e : The difference etween a rms net assets and its lia ilities.

s ec l : irms that focus on one type of investment management style, product or client type.

s e en o c ow : ummarises the cash movement of a company over a period of time.

v l e ock: haracterised as relatively well esta lished, high dividend paying companies with low
price to earnings and price to ook ratios. ssentially, they are diamonds in the rough that typically
have undervalued assets and earnings potential.

ven e c l : rivate rms that throw money ehind startup rms and small usinesses that
promise strong growth potential. These rms also provide technical expertise and managerial
experience.

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In this section, the ook will take a look at the most common ways of assigning a market value to a
company, also called valuation techni ues.

TI I
uity analysts commonly use nancial ratios as a way to value the stock of a company. peci cally,
they use ratios to analyse a companys past and present performance and predict future nancial
results. enerally, ratios are evaluated as a time series over the last few years, as a comparison
against other industry competitors or as a comparison against enchmarks. atios are derived from
line items on a companys nancial statements alance sheet, income statement and statement of
cash ows . elow are some common valuation measures used in evaluating companies in multiple
industries.

p ceM l le :

p ce o E n n c k /e g

p ce o ook c k / [a ]

p ce o s le c k /s v

p ce o ow c k /o g w

po l r o:

re non le n i /s

g o n [s -c G s ]/s

re non e r a n i / av g w

re none r E n / av g w
q

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V g c

l nces ee r o:

a e no e s / av g w

acco n ece le ar no e s / av g w ar

in en o no e c g /a v g
w v

acco n le no e t v / av g
w

sol enc r o :

e oc l t /t ( +
k+ q )

e oe t /t q

I T W I
The analysis has many variations, ut it is simply a valuation exercise of pro ecting the cash ows
of the company into the future typically ve to seven years and then discounting them to the present
value using the companys W . This type of analysis is commonly taught in usiness schools and
academic texts, ut is not roadly used in industry. any proponents argue that predicting terminal
cash ow value and an appropriate discount rate are highly su ective and exposed to vast error.
owever, the concepts of a analysis are often used in some form to evaluate investments. The
following is a simpli ed approach to doing a discounted free cash ow analysis. eep in mind this is
a general outline and does not include many of the more detailed nuances of the analysis.

tep :
alculate free cash ow for ve to seven years in the future. nalysis is ased on the nancial
pro ections made on the pro forma predicted alance sheet and income statement.

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V g c

alculating free cash ow

et income

epreciation and amortisation expenses

ear over year changes in deferred taxes

ear over year change in net working capital current assets current lia ilities

ash ow from operations

apital expenditures

ree cash ow

tep :
etermine the terminal value of free cash ows of the company when pro ections ecome too distant
in the future to predict. In essence, you are assigning a constant growth rate for the company eyond
the years that you can reasona le predict typically ve to seven years .

Terminal Value last year of pro ected free cash ows growth rate

T e ow e ll edon e eo n on

tep :
iscount each years pro ected cash ow and the terminal value to the present time using the
companys W the weighted average of the companys cost of de t and the cost of e uity .

xample of discounting ve years of free cash ows

ear ro ected free cash ow W

ear ro ected free cash ow W

ear ro ected free cash ow W

ear ro ected free cash ow W

ear ro ected free cash ow W

Terminal value W

Total present discounted cash ow value

V V .v . , x v ,
g , x v w , V J b . 101
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V g c

tep :
The discounted cash ow value is often referred to as the intrinsic value of the company. nalysts
compare this intrinsic value to the stock market value of the company to determine whether the stock
is over or undervalued.

If, Intrinsic Value tock arket Value, then the stock is undervalued uy

If, Intrinsic Value tock arket Value, then the stock is overvalued sell

or greater detail on valuation including more formulas, sample uestions and examples of the
analysis, see the Vault Guide to the Finance Intervie s the Vault Guide to dvanced and uantitative
Finance Intervie s and the Vault Finance Intervie s ractice Guide ook.

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ad E e n egan his career in investment management as a sell side e uity analyst with a ma or
ew ork ity investment ank. e was responsi le for generating uy and sell recommendations,
pu lishing research reports and communicating investment ideas with uy side clients. e most
recently worked in oston as a uy side e uity analyst for one of the worlds largest asset management
rms. s an industry analyst, he was responsi le for generating oth long and short investment ideas
to portfolio managers. r. pstein is a graduate of the niversity of ichigan , niversity of
alifornia, anta ar ara , and nderson chool of anagement .

ol nr c d on is an experienced nancial ournalist and market reporter. e graduated from The

niversity of iverpool with an in la our history after gaining an undergraduate degree in history
and politics. fter university, r. ichardson started his ournalism career in irmingham, efore
moving to a highly respected international energy pricing and reporting rm in ondon. e now writes
from his spiritual home of iverpool.

M p ll s nd is a graduate of the ollege of the oly ross and olum ia niversity. esides
writing for Vault, she is a daily contri utor at omedy entrals Indecision. he lives in ortland, aine.

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