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Asset Management Guide

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  • 1. Investment Management Career Guide: How to get an internship in Investment Management Prepared by Joykrishna Mahato MBA Class of 2007 VP of Equity Research, Finance Club and Investment Association In collaboration with other members of the Finance Club and Investment Association at the Stephen M. Ross School of Business at the University of Michigan August 27, 2006
  • 2. TABLE OF CONTENTS TABLE OF CONTENTS...........................................................................................................2 I. Introduction: What is involved?...............................................................................................3 II. Deciding on Investment Management....................................................................................3 III. Researching Companies.........................................................................................................4 IV. Attending Company Presentations and Networking.............................................................4 V. Recruiting Off-Campus...........................................................................................................4 VI. Preparing for Interviews........................................................................................................5 VII. Attending Wall Street Forum and Conducting Informational..............................................7 VIII. Sending Cover Letters and Resumes..................................................................................7 IX. Practicing Interviewing in Mock Situations..........................................................................7 X. Conducting Interviews............................................................................................................8 XI. Following up after Interviews...............................................................................................9 XII. Researching a Stock.............................................................................................................9 XIII. Pitching a Stock................................................................................................................11 XIV. Recommended Classes.....................................................................................................15 THIS DOCUMENT IS FOR INTERNAL USE ONLY. DO NOT DISTRIBUTE IT TO ANYONE ELSE OUTSIDE THE ROSS SCHOOL OF BUSINESS AT THE UNIVERSITY OF MICHIGAN. 2
  • 3. I. Introduction: What is involved? How much effort and time will it take to get an internship in Investment Management (IM), and why should you put up a lot of extra effort? The time you need to spend preparing for interviews will depend on how much background you have in investment analysis and how successful you want to be. Your success in the recruiting process will be directly related to how well prepared you are. If you have a lot of background in this business you will probably need to spend only 5 or at most 10 hours per week over the next few months before interviews start. If you are like most people, who do not have experience in the business, you should be spending 10-20 hours per week preparing for interviews. You will have to treat recruiting as a regular class and spend time on a daily basis. That sounds like a lot of extra time and effort but the reality is that it is not easy to get an internship in IM but the rewards of the business are exceptionally good for those who get in. To give you a sense of how much time you need to invest, and what you need to do, I outline what the most successful people have done in the past. II. Deciding on Investment Management The first and most important step is to decide whether you really want to do this. Because it is not easy to get an internship in IM, you should have a commitment to go through the tough recruiting process. What we have seen over the years though is that if you are ready to commit yourself to this career path and put in the efforts required to prepare yourself, you would get a job in the end. Moreover, keep in mind that the effort required for interview preparation would not allow you to pursue other back-up career paths, particularly two careers that have very little in common, such as consulting and investment management. Those who are not convinced that they want to do this and do not commit themselves typically end up working somewhere else. The question naturally arises on how you can decide whether you want to get into IM. Following steps can help you understand what is involved: a) Read this document in its entirety b) Read ‘Roadmap to the Buyside’ available on the IM website c) Talk to second year students who interned in research last year Once you have decided that you want to pursue a career in IM, make sure to join both the finance club and the investment management club. It is essential that you join both clubs and do not miss any of the club events. You must treat the club meetings as regular classes. You should target to make a decision by end of September. Remember, sooner you make a decision, more time you will have for interview preparation. 3
  • 4. III. Researching Companies You should complete this by October, and your goal should be to: First, learn about IM as a business and decide what aspect of it sounds most attractive to you. In other words, do you want to work on the "buyside" or the "sellside"? Do you want to do equity research, fixed income research, or quantitative research? Finally, do you want to research domestic companies or focus on international companies? You do not need to know exactly what you want but it is good to be relatively focused once interviews start. Most people interview for both buyside and sellside but few would pursue both equity and fixed income together. Second, develop a target list of firms that that you want to interview with. Most people try to interview with as many firms as they can but you will do better if you know which ones are most important to you and concentrate your preparation on them. Third, learn as much as you can about the firms on your target list as possible by: a) Using the resources available on Student Career Services website b) Talking to Ross students who have worked there before, even if they were not in IM c) Attending company presentations and meeting company representatives (see Step IV for further details) d) Talking to alumni who currently work at the firm. But, make sure you have basic knowledge before you talk to alumni. IV. Attending Company Presentations and Networking 1. The point of these presentations is to help you learn about the companies which will be interviewing but more importantly to give you the chance to meet and talk to people who work at the company. 2. These presentations are a great opportunity for you to figure out what a particular firm is like as well as learn about the IM business in general. 3. These are also an opportunity for you to get to know some of the people who work at the firm. It is worthwhile to meet the personnel representatives as well as other members of the firm. If you had a good conversation with someone then you should get his or her card and send a thank you note to him or her. 4. Ask insightful questions during the Q&A. If you are not sure whether your question is worth asking an alumnus, talk to a second year. While a good question does not necessarily make a good impression, a bad one can definitely hurt. V. Recruiting Off-Campus Unfortunately, there are very few companies recruiting on-campus for IM. Therefore, it is essential that you recruit off-campus in order to ensure that you have an internship. While it may sound little scary, most of us get jobs off-campus. You should follow the steps outlined below to succeed in off-campus recruiting: 4
  • 5. a) Read the ‘Roadmap to buyside”. It explains the process of networking in great detail. b) Participate in stock pitch competitions such as those held in Cornell and UNC. Many firms are sponsors in those competitions and you will have a great opportunity to network c) Talk to alumni. You will be surprised how helpful our alumni are. But you must respect their valuable time. In addition, they expect focus and commitment from you and do not want to spend time explaining why you should be in the business. VI. Preparing for Interviews 1. Polishing your story: The bottom line here is to have very good answers for the questions "Why do you want to do IM?", "Why do you want to work in their firm in particular?" and "Why should your background make them want to hire you?" Another important part of your story should focus on why you chose Michigan over other schools. It is common to get a question like “Why did you choose Michigan if you wanted to do IM?” Also, I must emphasize here the importance of your story. It can make or break your chances for a job. While nicely polished story does not ensure a job offer, a less structured one will certainly keep you out of one. 2. Walking through your resume: In almost every interview you will be asked to walk the interviewer through your resume. You should have a polished 2-3 minute story. This is a great opportunity for you to answer the questions listed above. As you talk about your resume, emphasize the skills you have gained that would be relevant to IM, show them how your experience has led you to pursue a career in IM and why you want to work at their firm. When you talk about your experience and your desire to pursue IM, you should try to show some enthusiasm. You are unlikely to get a job offer if you are not passionate about the job, no matter how qualified you are. 3. Preparing strong stock pitches: (Most of the time you will only need 2 stocks but you should have three ready. 2 of them should be buy and 1 sell.) This is by far the most important step in the whole process. The interviews will be largely focused on your stock pitches and they will decide to hire you or not largely on how well you know and present your stocks, and how enthusiastic you are talking about stocks and markets. (See step XII on researching stocks and step XIII on pitching stocks for more information)  Preparing for industry oriented questions: Interviewers may ask questions like, "If you were to analyze the software industry, what would be the most important factors that you would think about?" Or "Tell me about the specialty retail industry and whether you think it is a good industry to invest in right now." What they are looking for is whether you understand the things like the cost structure of the industry, the key drivers of earnings growth and how those things affect the stock performance in the industry. Some industries are affected by macroeconomic factors and you should have a view on the economy. 5
  • 6. To prepare for these type of questions:  Read Porter's book Competitive Strategy: Techniques for Analyzing Industries and Competitors, which gives an excellent framework for industry analysis. (The first two chapters give you the basic outline of "Porter's five forces" so if you don't have time to read the whole book you can just read the first 50 pages). This is also covered in CSIB 502 and hence, you should understand the basics when you work on your cases.  Read about the specific issues of many different industries and make up an industry notebook, which has a 1/2 or 1 page summary of the key drivers of the different industries. There are a group of 15 industries that are asked about most often. They are: Autos, Airlines, Apparel & Footwear, Banking, Broadcasting & Cable, Computers Hardware, Foods & Nonalcoholic Beverages, Healthcare: Pharmaceuticals, Household Durables, Investment Services, Lodging & Gaming, Publishing, Restaurants, Retailing: General, and Transportation: Commercial. If you do not have time to read about these many industries, make sure to learn about the industries you worked at before you came to the business school. The best resource for learning about the particular issues for industries is Standard and Poor's Industry Surveys. You should have online access to these surveys through Kresge Library.  Preparing for general stock market questions:  The best way to do this will be to read the Wall Street Journal, and Financial Times, and to watch CNBC regularly (although CNBC is of less importance than the WSJ and FT). While WSJ covers US well, FT is better for international coverage. If you are planning to pitch an international stock or want to express your view on a particularly industry outside, you should read FT regularly.  Subscribe to Barron’s. It nicely summarizes the economic and market events of an entire week. In addition, interviews with successful fund managers can help understand what works and what does not.  Read books on the stock market in general (One-up on Wall Street by Peter Lynch is good for starters)  Preparing insightful questions about the firms:  Interviewers will almost always ask you if you have questions for them in the last five or ten minutes of an interview. They do this mostly to see how much you know about their firm. Have at least 5 good questions prepared for each company. Again, if you are not sure how good your questions are, get those run by a second year student.  The more knowledgeable your questions are, the more they will think of you as someone who is genuinely interested in their firm. If you are switching 6
  • 7. career, you can show a lot of interest, enthusiasm, and passion by asking great questions. VII. Attending Wall Street Forum and Conducting Informational You should have your resume finalized, a polished version of your story ready, and at least one stock pitch handy before you venture into these following steps. 1. Wall Street Forum, a yearly event organized by the finance club, takes place after Fall A is over. You MUST go on WSF. Your objective in WSF would be to meet with as many people from research as possible. If you do not get to meet with anyone from research in a particular firm, talk to the recruiter and let her know that you are interested in research. Request her to get a contact in research and follow-up with the contact. 2. Chicago Forum, which was organized for the first time by finance club last year, is another event you should consider to attend. It is not mandatory but it does not hurt to learn about different firms, even if they are not your targets. 3. Informational interviews are not mandatory but strongly recommended. Do not go on these interviews unprepared. Companies do not ask you to come for informational interviews and hence, you should go there only when you feel prepared. Although these are called informational, you must treat them as real interviews. If want to practice an informational interview, get in touch with any of the club officers from the investment association. VIII. Sending Cover Letters and Resumes 1. This step does not require a lot of explanation. You simply need to send cover letters and resumes to the contacts at the companies that are coming for campus before their deadlines. The companies and the names of the contact person are listed in Job database. To get a list of companies that are coming to campus simply go into the Job database and search for all companies in the IM industry coming for internships. You can post your cover letter and resume to a job through Impact. For off-campus recruiting, you will have to email your resume and cover letter to the recruiter directly. 2. Sample cover letters are available from club officers on request. We do not want to post them online in our club website. IX. Practicing Interviewing in Mock Situations 1. It is one thing to prepare what you think you should say and another thing all together to say it well in an interview situation. The best way to get very polished at interviewing is to practice a lot with other people. 2. In December and January, both Finance and Investment Management club will conduct mock interviews. Make sure to participate in those. In addition, you can do mock interviews through the career services mock interview program with career counselors. 7
  • 8. 3. Apart form the mock interviews with second year students, I strongly recommend that you form groups of first year students and practice interviewing each other. That way when interviews start in January each one of you will have gone through enough interviews before you have your first real interview. X. Conducting Interviews The typical interview will be a half-an-hour which will be structured something like this: 1. Interviewers will almost always spend first 5-10 minutes having you walk them through your resume. You should have a very polished story that sells your analysis skills and shows how what you have done has led you to your interest in investment management and, if possible, their firm in particular. 2. They will then spend the next 10 minutes having you pitch them stocks. They will usually ask for 1 stock. They will ask you what stocks you like, you should give them a 2-3 minute pitch, and then they will ask you questions about your stock ideas. Beware of interviewers who ask you question like, "What stocks do you own now?" or "what was your best or worst performing stock in the last year?" Interviewers know that you work hard to prepare 2-3 stocks for interviews and they will try to get you to talk about stocks you have not prepared to see how deep your knowledge goes. If you know the details of your best performing stock this year very well then go ahead and talk about it. But I would recommend that you stick to talking about the stocks that you prepared as much as you can. The best way to prepare is to have answers to those questions ready but when they ask questions like the ones I listed above and you are not prepared for them, I would recommend that you talk about one of the stocks that you prepared as if it was a stock you owned rather than talk about a stock that you may not know about the details. 3. They will usually spend at least 5 minutes asking you general questions about stocks or to analyze a particular industry. (See Preparing for Industry Questions part of "Preparing for Interviews") 4. Finally they will almost always spend the last few minutes of the interview as a time for you to ask them questions. You should NOT have any notes or handouts (other than your resume) with you since you will be expected to have everything about your stocks memorized. In the interview you should be focused on achieving the following things:  Subtly convincing them that you have the skills to analyze stocks very well. They will judge you on this through how good your stock pitches are, how good your answers to industry and other stock market questions are, how well you present how your past experience has prepared you for this job.  Communicating your passion and enthusiasm for investment management in general and their firm in particular. This is far more important than your skill. Most companies assume that because you are at one of the top MBA schools, you have the necessary skills to do the job. What they look for is your passion. All your 8
  • 9. answers and even your questions should bring out the strong interest that you have in this career. Remember, it is difficult to fake your interest. The recruiting process is so exhaustive that they will filter you out at some of point of time.  Creating rapport with the interviewer. The fact is that a lot of the decision regarding whether or not they hire you will come down to how well they think you will fit in at the firm. I have heard that one of the questions that interviewers are asked about the people they interview is, would you want to work in the same office with this person 10 hours per day. So do not get carried away with trying to impress the interviewer with your knowledge and forgetting to create a good personal rapport with the person. XI. Following up after Interviews 1. Send a brief thank you note via email to the interviewers. In the note you should tell them something like this: you enjoyed the conversation you had with them, mention something specific about what you talked about in the interview that supports you, reiterate your interest in the job and finally thank them for taking the time to talk with you. 2. If you do not get called back to the next round of interviews, email or call the interviewer you spoke with in the first round (being very considerate of their time) but ask for feedback as to why you were not chosen. The feedback can often be very informative about how you are being perceived which can help you be more successful in your other interviews. 3. If you do get invited to the next round, I would recommend a thank you note as well but in this case you should ask the person if they would be willing to give you feedback as well. Your first round interviewer(s) clearly liked you and probably does not want you to do poorly since it would make him look bad so it is probably worth while to talk to the person and more insight into what the firm is all about and what to expect in the second rounds. As always, be very respectful of their time since being too demanding could seriously hurt your chances going forward. XII. Researching a Stock This is too complicated to fully address in this context but there are certain frameworks that are useful. 1. The best single source that I have found that will teach you how to research stocks is Security Analysis on Wall Street by Jeffery Hooke. This book walks you through every step of the process. 2. There are really two major ways to come up with stocks to research.  Top-down approach  This means that you start by assessing the prospects for the economy and decide which industries will outperform in that environment. For example, in the early stages of a recession more defensive companies (such as food companies) will do better since their revenues and profits are likely to be least impacted by bad times. People don’t stop eating just because it is a recession. 9
  • 10.  Then analyze each promising industry for the stocks that are most likely to be successful in the economic environment that you are predicting.  Finally, analyze the companies that you have chosen to see which one has the most price appreciation potential for a given level of risk. Keep in mind, a good company does not always mean a good stock.  Bottom-up approach  In this case, you start by looking for individual companies with certain attractive characteristics. Most people who use this technique will screen for certain fundamental characteristics that they want to see in a company. For example, some people will screen for companies with earnings growth over 15%, low debt to capital ratio, and a P/E ratio that is lower than the industry average. You can make use of FactSet, available in our trading lab, to screen stocks.  Once the person has a list of stocks that fit whatever criteria they think is useful, they will research the stocks that seem most promising.  The last method is to choose a stock that you know well and like the business. The advantage of this approach for picking stocks to research is that in interviews past knowledge of a company may be very helpful when you are being asked detailed questions about a company. 3. There is not a single set of information you have to know about a company but the following is what Fidelity tells its analysts they should be focused on.  Assess the condition of the industry.  What are the trends in the industry?  What are the drivers of profitability in the industry?  What is the competitive landscape like?  Analyze the company's operations  How efficient is the company relative to its competitors?  Is it a low cost producer?  Assess how well the business is run  Assess the quality of management  What is their track record?  How well do they understand their business?  Where do they want to take the company and does that make sense?  Financial statement analysis  Look for trends in key ratios and margins  Look for hidden problems  Conduct full analysis of the relevant financial issues  Competitors and Customers  What is the competitive environment like?  What is the condition and nature of their customer base?  Capital Structure 10
  • 11.  Are there any debt issues?  Is there any liquidity issue?  Will this company be able to survive a down turn in its business?  Valuation  Using the metrics appropriate to this company decide how attractive the valuation is relative to the company's peers, its history and its intrinsic value (i.e. DCF)? XIII. Pitching a Stock 1. There are two different contexts in which you will pitch a stock. The first is in front of the investment association officers and the second is in front of interviewers. There are slightly different rules (such as you should not bring a hand out to interviews) but essentially your pitch should be the same. 2. The structure of the 2-3 minute pitch should be:  Introduction: Provide a brief description of the firm and key data  Articulate your investment thesis around three bullet points: Include in this section the answer to the question, why the price is going to change? And how and when can we exploit this?  Conclusion: Give a price target for a given time horizon and describe very briefly how you came up with the price target. What follows is an expanded version of the basic structure of a pitch:  Introduction: Provide a brief description of the firm and the stock • The purpose of your introduction to the firm and the stock is to help your listener place them mentally within their knowledge and previous experiences, for instance to decide what valuation method to use, what ratios to look for or what industry to compare it with. • Give a quick, one-line explanation of the firm and sector: e.g. for-profit education services provider in the north-east region. • Provide basic info on the stock: current price and market cap (e.g. xyz is a 14 billion dollar company currently trading for $32 per share at a P/E of 20.)  Articulate your investment thesis around three bullet points • Start by giving three bullet points on why to invest in the company in a much summarized way and then elaborate a bit longer into a full fledged sentence. Then, you can go on to discuss each point at length, especially if you are questioned. • As a rule of thumb, it is a good idea to have your three points address company performance, financial performance (this is your opportunity to drop numbers in the conversation), and valuation. • Guide the listener. Use the golden rule: First, tell them what you going to tell them, second, tell them what you have to say, and then tell them what you just told them. 11
  • 12. • Example: how to articulate the pitch around three bullet points Summarized Full fledged Long argument point sentence Strong growth Strong demand Emphasis on security and recent prospects will help above terrorist attacks has increased the average growth need for security monitoring software. for next 5 years Recent terrorist attacks underlines my belief that security will be an issue for many years to come, and the company’s competitive advantage on scalability will allow it to post strong revenue growths. Higher margins Increased sales of Current operating margin stands at software in the 15% with sales mix of 50:50 between product mix will software and hardware. The company improve margins has been increasing the software in the mix for last two years and they can increase it to as high as 70%, which will help them improve the margin to 20% because software margins are much better than those of hardware. Compelling Recent downside The company missed the last quarter valuation offers compelling and the stock went down by 20%. I valuation believe the reaction was overblown and it offers a compelling valuation because it now trades at 20x compared to its historical P/E of 30x and peer group P/E of 28x. • Within your three bullet points address: Why is the price is going to change? How and when can we exploit this?  New information Don’t just relay everything that has been published about the firm. If the markets are efficient, all the information has already been incorporated into the price and nothing you do or say is going to make it move. Therefore, you have to contribute some new piece of information. The typical objection a portfolio manager can raise to your story is: What do you know that the stock market doesn’t already know? This can be something that you have genuinely discovered, or provide a different interpretation of the known facts and the reason you are right and the rest of the Street are wrong. 12
  • 13. Here are some examples: a) Analysts fret about exposure to poorly performing auto industry. I have spoken with distributors and estimate that 80% of new contracts are with fast-growing health care clients. This tells me that sales figures are going to be surprisingly positive, up by 12% sequentially on 3Q 06. Buy; b) Unit sales are holding relatively well (75,000 Q4 versus 76.500 in Q3). I have a contact at the company’s major competitor that reveals their revenues (the competitor’s) are hurting (-8.5% YTD) because company A is offering big discounts. I see margins deteriorating rapidly, falling beneath 17% by next quarter. Sell; c) Electric chainsaws are being touted as the next Father’s day hit. My research indicates that 50% of US households do not have extension chords long enough to put electric chainsaws to any good use. The company has manufacturing capacity for 127m chainsaws annually or one chainsaw for each household in the country. It won’t be able to dispose of its inventory, so a big write-off is coming. Sell.  Catalyst Not only must you add some piece of information, you also have to know when and how it will be incorporated into the stock price and will validate your thesis. You need a catalyst. Examples: a) Competitors are reporting next week. Once everybody sees that they are doing poorly because they lack an entry-level product, it will become clear that our company (the only producer of cheap entry- level products) will be assessed differently; b) The FDA is ruling on a new drug from XYZ Corp. this Thursday. If it is approved, this will be great news for our company, because its new blockbuster is based on the same compound as this company’s new drug. c) Nokia is the major cornerstone of the demand for low-consumption memory chips. Nokia publishes a quarterly forecast for the number of mobile phone handsets globally. If in its forthcoming estimates Nokia lowers its forecast, widens the range or makes any comments that it is becoming more difficult to predict what the demand will be, this highlights growing uncertainty for semiconductor manufacturers. Therefore, an upward adjustment to the discount rate for the stock would be warranted, and lower stock price should follow. d) Last quarter’s earnings for Cognos was below expectations and the stock got hammered. Next quarter’s earnings is going to be far better 13
  • 14. because they have taken care of the sales force problem of last quarter. Improved earnings will put Cognos back in the limelight.  Conclusion: Give a price target for a given time horizon and tell the person very briefly how you came up with the price target. At the end of the pitch when you talk about the attractive valuation of the company you should transition into your conclusion. Very quickly repeat your three bullet-points and show how those bullet points will lead to earnings (and/ or cash flow) projections and a future valuation that makes this stock a compelling buy/sell right now. Example: Given the strong demand for the company's product, its expanding operating margins I think the stock will earn $2 per share in fiscal year 2002. The cheap valuation makes the stock a compelling buy because with the conservative assumption of no expansion of the current multiple of 20 times earnings and 15 times EBITDA the stock should increase 30% to $40 per share in 12 months." You should also talk about the Discounted Cash Flow (DCF) value for your stock and why under conservative assumptions this makes it a compelling buy. Once you have done this just sit back and wait for the interviewer to ask you questions about your stock.  Some final remarks on pitching stocks Do not talk about the investment risks or downside of the stock (unless you are pitching a sell or the interviewer asks for them). It is the interviewer's job to be a skeptic and find objections to your recommendation. If the objective is to get them to buy the stock, don’t make their task easier. Having said this, think about the objections they can raise and try to counter them even before they are uttered. Think ahead. Anticipate questions. All the assumptions that you have made to come to your price target are likely to be the areas of questioning. I don’t believe that it is necessary to write down the investments risks to on your handout. Use numbers: Spinning a good story is good, but virtually everybody is able to spin a story. Hard facts and figures add credibility. Keep the structure of pitch in mind all the time: 30 seconds of introduction mentioning three bullet points, 2 minutes of explanation of each bullet points, and 30 seconds of conclusion mentioning those bullet points again. Valuation: You should use at least two valuation techniques to arrive at your target price. One should be a multiple and other should be a DCF. Your target price should be an average of the two values determined from these two techniques. In addition, you can always use other multiples to support your thesis if somebody pokes hole at your argument. 14
  • 15. XIV. Recommended Classes The classes people have found most useful have been in the areas of Accounting, Finance and Strategy. 1. You want to get as much accounting as you can but especially ACC 502 (Basic Accounting) and ACC 552 (Management Accounting). ACC 564 (Financial Statement Analysis) is essential for people interested in IM. ACC 712, which is taught only for second year students, is also recommended. 2. Finance courses that we have found most useful are: FIN 513 (Financial Analysis) and FIN 615 (Valuation). FIN 615 teaches DCF, along with other valuation techniques. Interviewers assume that you know how to do a DCF on your own. 3. Other classes that people have found useful are CSIB 502 (Competitive Strategy) and MKT 503 (Marketing), which is useful in terms of providing frameworks for analysis of companies. 15