Careers in finance


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Careers in finance

  1. 1. See the Disclosure Appendix for the Analyst Certification and Other Disclosures.Car eer s in Finance January 5, 2005 Scott Peng Citigroup Global Markets
  2. 2. The Basics • PhD in Engineering / Science from MIT • What next? • What is finance? • Is finance the right career choice? • How does one break into a totally different profession?Page 2 Citigroup Global Markets
  3. 3. What is Finance? • Finance involves the selling or buying of investment instruments on behalf of either oneself or customers • Aspects of finance includes (but is not limited to) – Interest rate analysis – Credit analysis – Risk management – Portfolio theory and application – Financial engineering – PsychologyPage 3 Citigroup Global Markets
  4. 4. What is Finance? • When one says finance, one usually thinks of … – Salomon Brothers (Now Citigroup Global Markets) – Goldman Sachs – Lehman Brothers – Etc, etc • But … there is a lot more to finance than just those names • Finance companies can be broadly grouped into – Buy side – Sell sidePage 4 Citigroup Global Markets
  5. 5. Financial Institutions: The Old Days (Mid 90s) • Sell side – Investment Banks • Buy side – Commercial banks – Mutual funds & Money managers – Insurance companies Page 5 Citigroup Global Markets
  6. 6. Financial Institutions: Now • Sell side – Investment banks – Commercial banks • Buy side – Finance entities – Commercial banks – Mutual funds & Money Managers – Insurance companies – Hedge funds • There’s a lot more to finance than just investment banks Page 6 Citigroup Global Markets
  7. 7. Buy Side • Finance Entities – Government sponsored enterprises – Fannie Mae, Freddie Mac – Finance subsidiaries – GECC, GMAC, FMCC – REITs • Commercial banks – Citibank, Chase, BankAmerica • Mutual funds & Money managers – Fidelity, Putnam, Alliance, PIMCO • Insurance company – MetLife, Mass Mutual, Aetna • Hedge funds – new kids on the blockPage 7 Citigroup Global Markets
  8. 8. Buy Side • Invest client assets • Performance judged against benchmarks – Equity funds: S&P 500 – Bond funds: Lehman Aggregate Index of Citigroup Broad Investment Grade (BIG) – Hedge funds: Pure “alpha” • Key roles – Credit analyst – Risk manager – Portfolio manager / Trader – Client relationship managerPage 8 Citigroup Global Markets
  9. 9. Buy Side: Finance Companies • Examples: – Fannie Mae & Freddie Mac – GECC, GMAC – REITs • Invest assets versus borrowed capital to maximize return or dividend in a risk controlled fashion • Risks – Asset-Liability Mismatch – Credit risk – StructuralPage 9 Citigroup Global Markets
  10. 10. Buy Side: Commercial Banks • Invest cash from – Checking accounts – Saving accounts and CDs – Ongoing operations and investments • Invest to maximize return while managing risk subject to regulations • Regulation – May invest only in bank eligible securities – Investments subject to risk-based weighting • Risks – Asset-Liability Mismatch – Credit risk – StructuralPage 10 Citigroup Global Markets
  11. 11. Buy Side: Mutual Funds and Money Managers • Mutual fund managers and money managers (institutional) are not necessarily one and the same • Mutual funds: manage assets for retail investors • Money managers: Manage assets for institutional investors such as pension funds, insurance companies, universities • Major funds and money managers include (but is not limited to) – Equity: Fidelity, Alliance Capital, Vanguard, Putnam, etc – Bonds: Federated, Nuveen, PIMCO, BlackRock, WAMCO, etc • Manage assets versus benchmarks – Volatility of return versus gains, slippage versus index – Credit riskPage 11 Citigroup Global Markets
  12. 12. Buy Side: Insurance Companies • Invest cash from – Insurance policies and annuities • Goal: maximize returns while managing risk subject to regulatory and accounting issues • Regulatory and accounting – Capital standards and adequacy subject to state insurance commissions and NAIC – Myriads of accounting standards and issues – Investments subject to risk-based weighting • Risks – Asset-Liability Mismatch (biggest) – Credit risk – StructuralPage 12 Citigroup Global Markets
  13. 13. Buy Side: Hedge Funds • Been around since 1950s, exploded in popularity in last five years • Now over 7,000 hedge funds in existence • Hedge funds are grouped by their investment strategy types such as: – Equity long/short – Fixed income arbitrage – Convertible bond arbitrage – Global macro – Managed futures – Event driven – Emerging market – Private equity, venture capital and buyout (not strictly hedge fund, per se)Page 13 Citigroup Global Markets
  14. 14. Buy Side: Hedge Funds • Goal: Manage return versus risk (Sharpe Ratio) and minimize correlation to other asset classes • Advantages – Work on a variety of tasks – Relaxed, academic-like atmosphere • Disadvantages – Relatively narrow window of expertise – View of world is very different from non-hedge fund entities – A lot of new hedge funds out there • Understand style and riskiness of hedge funds. Do your own researchPage 14 Citigroup Global Markets
  15. 15. Sell Side: Investment & Commercial Banks • Commercial banks with securities subsidiaries now perform virtually the same function as investment banks • Sell side firms are generally considered as either large “bulge-bracket” or smaller niche firms • Bulge bracket: Largest investment banks – Broadest array of equity and fixed income products – Usually involved in most institutional trades • Niche – banks which focus on some specialties – Mortgage-backed securities – High yield bonds – Equity IPO – Financial futuresPage 15 Citigroup Global Markets
  16. 16. Sell Side Functions • Investment banking – Investment banking – Mergers & Acquisitions • Sales & Trading – Trading – Sales – Strategy / Analyst – Research • Product types: Equity and Fixed IncomePage 16 Citigroup Global Markets
  17. 17. Sell Side Functions: I-Banking • Investment banking – Grouped along industry lines – technology, insurance, finance, etc – Understand financing needs of clients – Work on debt and equity issuance to raise capital – A lot of presentations and long nights • M&A – Understand growth and longer term needs of clients – Work on finding acquisition targets or sell unnecessary parts of firm – A lot of presentations and long nights • These jobs mainly filled by MBA’sPage 17 Citigroup Global Markets
  18. 18. Sell Side Functions: Sales & Trading • Trading – Make markets on securities – generally a small segment of market – Make money trading with customers and taking positions – Specialization: Know a lot about a relatively small segment of market – Smoke big cigars if you’re right • Sales – Understand client goals – Discuss and propose trades – Know something about a broad segment of marketPage 18 Citigroup Global Markets
  19. 19. Sell Side Functions: Strategy & Research • Bond Strategy / Equity Analyst – Understand markets & investors – Discuss trades and market conditions – Must have good communications skills – writing and speaking • Research: Most PhD’s start their careers on Wall Street here – Quantitative bent – Work on implementation of trading models and simulations – Come up with new models and ways of looking at the world – Excellent training ground for future traders/salespeople – Can have long term career in researchPage 19 Citigroup Global Markets
  20. 20. Sell Side: Strategy & Research at Citigroup • Citigroup, Inc. is the world’s biggest financial services firm • Citigroup Global Markets, Inc. is the investment banking unit • Citigroup Fixed Income Quantitative Research – Approximately 100 in the U.S. – Approximately 250 in Global Fixed Income Research – 40% PhDs – Strong emphasis on quantitative aspects of fixed incomePage 20 Citigroup Global Markets
  21. 21. What Makes You A Good Wall Street Candidate? • Knowledge – No, not about solving nonlinear fifth order coupled pde’s – Read and understand the product and role for which you’re interviewing – For example, Fabozzi’s “Handbook of Fixed Income Securities” (1373 pages) is a must-read for bond prospects • Teamwork: Show you can operate in a team environment as both a follower and a leader – Student government – Intramural sports – Volunteer • Communications: Must be a good communicator • Well rounded: Have interest outside of the lab • Take business school classes to achieve a basic understanding of financePage 21 Citigroup Global Markets
  22. 22. It Is Not Easy for PhD’s (Non-Econ) to Break In • Added burden of proof – Why do you want to do this? – Why leave science / engineering? – How do you think what you know applies to finance? – What do you know about what we do? • Need to demonstrate basic understanding of product • Work on having the qualifications that would make you an attractive candidate (see previous page) • Think of ways of applying the combination of technical skills and finance – Develop a business plan for a potential new venture – Read technical finance literature • Journal of Fixed Income, Journal of Finance • Risk MagazinePage 22 Citigroup Global Markets
  23. 23. Disclaimer ANALYST CERTIFICATION I, Scott Peng, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views in this report. ADDITIONAL INFORMATION AVAILABLE UPON REQUEST Citibank, N.A., London Branch and Citigroup Global Markets Inc, including its parent, subsidiaries and/or affiliates (“the Firm”), may make a market in the securities discussed in this report and may sell to or buy from customers, as principal, securities recommended in this report. The Firm may have a position in securities or options of any issuer recommended in this report. An employee of the Firm may be a director of an issuer recommended in this report. The Firm may perform or solicit investment banking or other services from any issuer recommended in this report. Within the past three years, the Firm may have acted as manager or co-manager of a public offering of the securities of any issuer recommended in this report. Securities recommended, offered, or sold by the Firm : (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or other obligations of any insured depository institution (including Citibank); and (iii) are subject to investment risks, including the possible loss of the principal amount invested. The Firm are regular issuers of, and trade in including position taking), traded financial instruments linked to securities which may have been reported on in the preceding research report Investing in non-U.S. securities, including ADR’s entails certain risks. 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