Interview # 6: The Equity Analyst (part 2)

Interesting People

In part 1 of our interview, Tom provided us details of his background – from his past work experiences to the pursuit of his dream to become an equity analyst.

We pick things up right where we left off and Tom now focuses on his current role as an equity analyst for one of the major banks.

Let’s hear from the man himself..

THE PRESENT

MMA.  So you’re an equity analyst now. How did you finally land there?

Tom.  Well you know the story; I worked as a consultant in one of the big banks and whilst in there, I was looking at opportunities internally. I remember that we even had a conversation on how best to approach this. To cut a long story short, I saw an opening for an equity analyst position, applied and here I am.

MMA.  Now let’s focus on your job now as an equity analyst. What do you do now on a day to day basis? 

Tom.  Before I get in to that, can I please make a distinction between the buy-side and sell-side.

MMA.  ..So your on the ‘buy’ obviously being part of the Wealth Management division right?

Tom.  Well…not really.

MMA.  Uhh, ok. Ill let you tell it. 

Tom.  It’s only because not a lot people understand it and it will give good context as to what I do.

Sell-side is more about selling the research and buy is more about reading those research reports and making that judgment call as to whether one should own that investment or not. My role is somewhere in between. What that means is that I do a little bit of the buy and a little bit of the sell. So how can this be if the industry only has either a buy or a sell side?

My business unit supports the distribution channel. We sell our research reports to the advisers who make investment calls based on our calls on behalf of the investor. We are still selling our research and we are still making money for the investor but not for our own firm. That’s the sell side of what we do.

On top of that we also manage our own portfolios which we recommend. We don’t invest our own money, i.e. we don’t really have an AUM which is a typical buy-side characteristic, so its not purely a traditional buy-side but there is that portfolio management component which is associated with the buy-side.

MMA.  What a strange beast!

Tom.  It is indeed. But going back to the sell again and to answer your question on activities, we do some analysis on industry trends for our portfolios, you know, where it is headed… we look in to the Financial Statements of companies… we come up with a set list of questions based on our analysis.. we meet with company management… we go through site tours to understand their business…we come up with our own projections of the Cash Flow e.g. putting dollar value on share price. Then we pull together something like a thesis on why we think our projections are the way they are.

The way we differentiate ourselves now from our competitors is that we have risk management framework for our underlying investments. So not only do we have the qualitative fundamental analysis models, but we also bring some quantitative models which we use on the company and their respective sector.

MMA.  Can you expand a little bit more on that last statement?

Tom.  Sure. So if you know that there are x number of ratios for example where one set of ratios may rate higher than the other one for company ABC than company XYZ..but then there might be a different set of ratios or factors that may rate XYZ better than ABC.  So the challenge here is that it would be harder to choose one over the other. Just on basis of ratios

To get over this hurdle we have given a weighted importance to those factors in order to have fair comparables.  With this risk management framework, we can say that a company with a score of 3.2 is riskier than another one with a score of 2.7, for example. So that gives us our comparable numbers to look at our risk matrix. So as I was saying it is quantitative and has to merge with our return expectations and the fundamentals of the company.  When it comes to expected returns we have to then think about risk adjusted returns;  a company might give you a big return but is highly risky compared to another company who are giving less but more consistent returns through time.  Of course we then look at what the client needs are i.e. are they after capital growth or are they after capital preservation, or is it somewhere in-between?

We then recommend stocks based on combination of risk underlying on that security and the return expectation.

MMA.  Right, well put. So is this is an industry wide framework or specific to your firm? Is this an MLC, BT, CFS, One Path thing[1]?

Tom.    Different firms out there are pure buy or pure sell-side. So pure sell-side researchers like JP Morgan or Morgan Stanley, will  look at a particular company in its entirety but generally speaking have no relative valuation to say this whether that stock is highly risky or less risky. They will simply say stock trading at $20 now and $25 after 2 years or something like that. But they cannot say whether it is highly risky or less relative to another stock or other market expectations as they are not looking at in in-depth as we do as part of our buy-side role.

In the buy-side we have reference holdings in our portfolio where we can establish whether a stock is either more or less risky than other stocks. And of course we do the in-depth market analysis for that stock too. So the holdings makes a lot of difference as we observe the behavior of that stock against other holdings in that portfolio.

So to answer your question, I would think that other firms should be doing the same thing but I suspect that this may be how we differentiate ourselves from our peers. As I mentioned previously, we are midway between buy and sell and have the skills of portfolio management and writing reports. The reports would talk about relative valuation so when we may say materials sector is very good… maybe we we’ll say BHP is preferred but RIO is much more preferred because of these reasons. We tend to go by relative valuations and go for the client needs in terms of when they want their money back, the risk profile of the person etcetera.

Does that sort of answer your question?

MMA.  Yes it does. More information is always preferred!  So it sounds like your enjoying your job right now?

Tom.    Yes I do.

MMA.  ..A lot of report writing… a lot of site visits..

Tom.    It is a nice blend but you know I have always aspired to be on the buy-side. So the way people get into industry, which may be helpful for your readers here, is that it’s relatively easy to go to the sell-side first because you get to specialise in a few companies, their particular sector and you can then take those learnings and write detailed reports about it.  If the market is good and demand is there, the sell-side will get a new head count and they will hire more analysts for that sector.

Buy side is much more scalable. You may have 3 people managing a portfolio worth $30 million but that doesn’t necessarily mean you need a 4th person to manage $300 million as the same skill set applies to managing the portfolio. What I am saying here is that it’s difficult to get into buy side.

To me its thrilling, looking at portfolio, checking the numbers on a daily basis and making a call. Compare this to the sell where you just say “Buy, Sell or Hold”. You might look at the exchange and say “I am a speculatively a buy now”. But really it moves just within those 3 ratings of buy-sell-hold. But for the buy its more thrilling, as you are the person with the trigger in your hand all the time.

MMA.  ..Because you are managing the portfolio now.

Tom.   Exactly. This is what we were talking about before where I referred to “owning people’s sentiment” as I am closer to that goal of making money work for the people.

MMA.  So is that 3 years or so?

Tom.   It really depends on the market. I’m not really in a rush you know as I really want to learn this game inside out. You know I have had a great start already being midway sitting on both buy-sell as I’m looking at portfolio as well.  It’s not with real money but still we have people investing into, so its close to where I want to be.

Am I enjoying, certainly yes. But is it IT? Probably not.

MMA.  Ok, fair enough. So what best part of your job then?

Tom.  I would say, talking to management…CTO, CEO, CFO or managing director. They know their products and services you know. They know the company culture, they know the industry very well. At the same time, they tend to be very optimistic and they blame the market on why it doesn’t appreciate the good products and services they have. So its interesting to challenge them in that the things they are doing right now is not really correct for the market conditions.

MMA.  So you really have to watch your words here.

Tom.  Hahah..I know, I know.

It’s pretty interesting to see these high professionals at that level twisting the question, defusing the question you know and not facing market reality.

MMA.  Cool. And the worst part?

Tom.  Talking to advisers regarding their clients money. In a difficult market like this, its so bad to see people panic. If their in it for long term, then by definition they shouldn’t worry about gains or losses but they still look at how much their portfolio has shrunk to. So I don’t really blame them as they pay fees to managers to manage their money…yet after paying those fees the managers are not really able to multiply their money.

So it’s answering those difficult questions, differentiating between short-term and long-term, looking at the losses…these are parts of my job that I don’t really enjoy that much.

MMA.  But you don’t have to manage that right. You make your call and that should be it right?

Tom.  Yeh true but as I was saying, I am also a buy side manager in the sense that I have to look at the numbers in my portfolio all the time.

MMA.  So it’s the case where people go “Look..the exchange is all red today. I better call my broker and withdraw my funds”

Tom.  Exactly. It’s a numbers game for me. So as you know there is a behavioral finance component that keeps working here. At times people don’t really listen so that can be a little bit frustrating at times.

MMA.  But that is something that you can’t help.

Tom.  ..which is why it’s frustrating. But that’s the whole investment culture here so I am learning to accept that fact.

I suppose another frustrating thing is working in a big firm, you run into people who in their own capacity are not managing money.. but they want to influence the decision on how to manage money. You do run into bureaucrats.

MMA.  Hahaha. But you work in a bank. That’s a given, you know that.

Tom.  I’ll give you an example. Before I do, I should say that this is not necessarily happening in my firm but this is how it generally works. Management would come in and say that “we should take care of our books and determine how much commissions are being paid on this product”. If it is not going to well then may be we should be more nice and promote that product more than others.

Luckily my group, within the bank, doesn’t really work like that. We tend to be very independent.

MMA.  So your saying that you have an independent voice in saying that product x is losing money and instead of promoting it, you should consider closing that down.

Tom.  Yes.

MMA.  Ok that’s good for a big bank. I have always perceived the industry to be one where their own products are recommended over another bank’s products.

Tom.  That may be true for other banks but does not apply to our group. I can recommend a product from a rival bank over our own products if appropriate.

The bad part is that there are a few forces against us.

MMA.  So you may receive internal pressure from other parts of the bank going “What in the world are you talking about recommending other products rather than our very own?”

Tom.  Yes and those are the forces we have to fight even though they know that we are independent. I have made reports previously on hybrids, for example, which was published. I had to field a lot of questions when I came out with that as the bank had a few deals based on it.  I came back and highlighted that I am neutral to all those deals.

You know the questions I do receive internally can be very sneaky too – “By the way have you considered that?”..”Have you thought about it this way?” Once again I just emphasized the independent nature of our group.  And that was that.

THE FUTURE

MMA. Before we wrap this very thorough interview, I cannot leave without asking about your future ambitions. What’s happening in the 5-10 years time slot?

Tom.    I would love to be on the buy-side firm of course.  So the good thing is that I will just look at my returns and that’s it. So it is very independent. It will be based on my merits and my calls and the relative valuation of my portfolio by the market. I can look at the portfolio and gauge if I am better or worst than the market – post fees and expenses.

MMA. As a portfolio manager? 

Tom.    Not really portfolio manager. I would like to take it very slow. In 3 years time I just want to be an analyst and not even Senior Analyst. You know these are usually small firms with only a few people managing it. The key for these guys is to raise money which is managed by the Portfolio Manager.

You know that out of 5 people in the firm, 2 are doing marketing, networking…going to media and talking about the market in general. It’s the other 3 guys that are hidden that do the grunt work. At this point in time I know I have a lot to learn from all those guys collectively. And that’s also speaking from the 3-year-window point of view.

MMA. So now your referring to the distinction between roles within the funds management group e.g. Senior Analyst as opposed to do the analyst that does the work.

Tom.  I am. Look, don’t get me wrong here. When I believe its time for me to move up, my hand will be raised. I am specifically talking about the structure of a small fund manager group, how it works and the average length of time it takes for one to progress from analyst to senior analyst to Portfolio Manager.

MMA.  Yep, got it and completely understand that.  So my final question to you is ironic because I know what you will say – but I will ask it anyway.  What is the most common tool you use for your craft?

Tom.  Excel!  You know it!

MMA.  Hahaha! So what about these fancy new applications they have in the market?

Tom.  ..what nice fancy tools? Come on man? It’s always Excel to do work and Bloomberg for the information.  I must add that with my background in IT, I know how to write macros and automate a lot of things.

MMA.  I know how that feels. You don’t want to wait for IT to give you a solution to your problems.  It’s more the case of “..just give me Excel and I’ll do it myself”.

Tom.  And you know it!

So concludes Part 2 of our interview with an up-and-coming equity analyst. We thank him, as we thank all, for giving us his previous time and insights into the industry. In case you missed part 1, it is located here.

For further context into the industry and the interview in general, please click on this file – MMA Real People – Equity Analyst. Like our interviewee, we are a fan of Excel and the power it holds.

Tom’s identity has been masked upon his request. This blog uses real people who have work in the Australian Banking and IT industry.

Did you enjoy this interview? Is there anything you would like to see more of? Please don’t forget to leave a comment.

Market Measures Australia


[1] In reference to the dominant Wealth Management businesses owned by the Big 4 Banks in Australia.

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