Many research analysts comment that there's not a typical day, nor even a typical week in research. On the equity side, the workload is highly cyclical. Everything revolves around earnings reports, which come out quarterly during "earnings season." The importance of the earnings figures to the stock analyst cannot be stressed enough, and once a quarter, when companies report their earnings data, the job often gets a little crazy.
On the fixed income side, the workflow depends entirely on the product. A high yield or high grade corporate bond research analyst may have some ups and downs in the workload based on the earnings season, but earnings reports are not nearly as critical as they are to equity analysts. We will cover a typical day in debt rest arch in abbreviated form at end of this chapter. First we'll take a look at a three-month period for an equity research analyst.
While we will focus on the analyst himself, keep in mind that the research associate will also perform many of the same tasks, helping the analyst in any way possible.
March
On March 1, four weeks prior to the end of the quarter (March 31), the analyst begins to look at the financial models relating to the companies under coverage. He is worried about his stocks' earnings per share numbers, which will be reported approximately two to four weeks after the quarter's end. If the estimated EPS numbers stray too far from the actual reported EPS when it comes out, the analyst will find himself dealing with many angry investors and salespeople, at the very least.
To fine-tune his earnings estimates, the analyst begins calling the companies that he covers, testing assumptions, refining certain predictions, and generally trying to grasp exactly where the company and industry stand. Details make the difference, and the analyst discusses with the company CFO gross margin estimates, revenue predictions, and even tax issues, to arrive at an acceptable EPS figure. Conversations such as these can become excruciatingly detailed.
April
The quarter has ended, and in early April the research analyst enters the "quiet period." During this time, companies are restricted from discussing their upcoming earnings release, as this may constitute sensitive "inside information." The calm before the storm, the "quiet period" (in this case, early April) finds many analysts calling other contacts in the industry to discuss broader trends and recent developments in the field.
Once companies begin reporting earnings (which starts mid-month), the analyst scrambles to quickly digest the information and issue one-page update reports. The deluge of company earnings releases causes long and hectic days for the analyst, who must deal with a barrage of phone calls and the demand for written reports from salespeople and institutional investors. Within two weeks after the earnings release, the analyst will typically publish another three-page report on his companies, often with new ratings, new analysis and revised earnings estimates for the next few quarters.
May
In early May, the analyst finishes writing update reports and is afforded a little breathing room. While earnings season involves putting out fires left and right, the end of the reporting period means the analyst can relax and get back to working on long-term projects. These might include industry pieces, initiation reports or other long-term projects. Banks with large corporate finance businesses may encourage their research analysts and associates to spend time working with investment bankers, developing leads, advising them who to target and performing a variety of other research tasks.
Where do new research ideas come from? And when and why do analysts change their ratings?
Frankly, many young analysts are told what companies or areas to cover - until one becomes a seasoned analyst, an analyst focuses on ideas based on firm demands. Veteran analysts with more leeway generate ideas either through industry knowledge or new stocks. Typically, investment banks will compel an analyst to follow a particular stock but will not dictate the rating assigned to the stock. The pressure to publish certain ratings, however, is real and cannot be understated, as it can come from all angles.
The writing process is straightforward, and really depends on the type of report needed. For the inch-thick industry report, for example, research analysts utilize research associates and assistants to the utmost. Analysts coordinate the direction, thesis, and basic content of the report, and do much of the writing.
For an introduction "initiation of coverage" report, the work parallels the industry piece. Substantial research, financial analysis and information gathering require much time and effort. Behind the scenes, management interviews and company visits to understand and probe the business render the biggest volume of data.
For less labor-intensive pieces, such as changes in ratings or updates, either the analyst or the associate whips out the report in short time. Keep in mind that the analyst usually produces the idea and reviews the report prior to press time, but the associate may in reality put together the entire piece (and put the analyst's name on top).
For all of these reports, research associates and assistants typically find data, compile other research, edit the written material, build financial models and construct graphs and charts relevant information. The analyst utilizes his or her contacts within the industry to interview insiders to get a glimpse of the latest trends and current events.
Travel
You'd better like suitcases and hotel rooms if you're aiming for a research analyst position - the position requires a great deal of travel. Usually, the full-fledged analyst (as opposed to the associate) does most of the work requiring travel, including meeting with money managers (the buy-side clients), company management, accompanying Corp. Fin. professionals on road-shows. However, associates will fill in for unavailable analysts, attend some due diligence meetings, and attend conferences and trade shows.
These occasional outside meetings aside, research associates spend almost all of their time in the horn office. On the plus side, many associates often meet with managers of the companies that come to visit the bank, meaning research associates have the luxury of meeting one-on-one with top management teams and investor relations representatives. This is especially the case in New York, where research analysts with big firms carry a lot of influence.
Fixed Income Research - Yawning?
The attitude of many equity bankers, equity sales and traders, and even some equity research analysts is that fixed income research is the most boring area in any investment bank. Why? Unlike stock analysts, mainly fixed income analysts do not have clients. If a fixed income analyst issues a report on U.S. Treasury bonds, there is no company calling, fewer surprises, and few salespeople/traders to sing the praises of a good research piece. More importantly, there is often less money to make. While equity analysts often can rise to "stardom" (i.e. II ranking), those that do in fixed income play second fiddle to the equity guys. All in all, the fixed income research job is one of the least glamorous on the Street.
A Day in the Life of a Fixed Income Analyst
How is the debt analyst different than the equity analyst? As previously mentioned, there is no earning I season driving fixed income as much as there is in equity. But corporate bond analysts and high yield analysts Jo have some seasonal swings. In municipal bond research, emerging markets research, asset-backed research, and government/Treasury research, reports are more evenly spaced and the stress and pressure often lower.
The day begins early for the debt research analyst just as it does for the equity analyst. Morning meetings take place around 7:30 Eastern Time, no matter where you may happen to work. On the West Coast, an analyst must be ready to go at 4:30 in the morning.
The day includes all of the typical work that an equity research analyst does. The analyst is on the phone with buy-side portfolio managers, doing fundamental research, writing reports, tracking bond prices and yield data, and looking for trade ideas to give to the salesforce. Hours tend to resemble the equity analyst, with 12 to 13-hour days the norm, but with less time on the road.
Key Success Factors In Research
Research Assistants /Associates
To excel initially, research assistants and associates must work hard, learn quickly, and become whizzes at Microsoft Excel and Word. Especially important to research associates are good writing skills, as analysts often hand-off a significant portion of the writing and editing of research reports to the associate. Early on, the biggest mistake a research assistant or associate can make is to mess up the financial models and generally lose sight of the details. Research is built on a foundation of good models with reasonable assumptions, and research associates must first master that domain. Later on, research assistants and associates must show an ability to handle the phones - answer questions from investors and internal salespeople about the current goings-on at companies they cover, as well as ask smart due diligence questions to company managers in order to generate the next research piece.
Unlike most corporate finance analysts, research assistants/associates can and do rise to the analyst level without an MBA. Some firms promote research assistants to the full-fledged analyst role after one or two years of solid performance, while some hire research associates only for two-year stints, emulating the corporate finance two-year programs. The firms that are less stringent about hiring MBAs full-time for research are more likely to promote internal associates to the analyst position.
Still, the number that makes this jump is a small portion of assistants and associates. Why? Some simply discover that the analyst job is not for them. Many research dropouts move to hedge funds, business school, the buy-side, or institutional sales departments at I-banks. Others simply find that the path to becoming a research analyst nonexistent. Explains one research associate at Morgan Stanley, "A lot of it's demand-driven. If you want to be the head technology analyst, you might have to wait until that person retires or moves to another firm. But sometimes they will add on analysts, maybe they need a retail analyst to bring I-banking business in. And sometimes a new subsector will turn into a new category."
Research Analysts
Newly hired research analysts must start as the associates do - learning, modeling, and working long hours. Beyond the inaugural two years, analysts begin to branch out and become full-fledged analysts, covering their own set of stocks and their own industry segment or sub-segment. Winning respect internally from Corp. Fin. and sales and trading departments may be the first hurdle a new analyst must overcome. This respect comes from detailed research and careful analysis before making assertions about anything. Salespeople can be ruthless when it comes to researchers who make sloppy or unsubstantiated claims. Says one fixed income insider, "There are people who will eat you alive if your analysis is off. They control a huge universe of issues and a huge amount of buyers to make that market liquid, and when you present your analysis you had better be ready. These guys are serious. It's like playing for the San Francisco 49ers; you better be prepared."
Down the road, research analysts - even good ones - are always on somebody's bad side. When the analyst wins respect from the salesperson by turning down a potentially bad IPO, he angers to no end the corporate finance banker who wants to take the company public. When the analyst puts a sell recommendation on a poor-stock, the salespeople also cheer, but the company grows angry, sometimes severing all ties with their investment bank. Thus, the best analysts function as diplomats, capable of making clear objective arguments regarding decisions combined with a mix of sweet-talking salespeople and investors.
Although not required, an MBA undoubtedly opens doors in research. Ten years ago, research departments cared little about educational pedigree and a business school education, but today more and more emphasis is being placed on attaining an MBA. Perhaps even more important than earning an MBA for those in research is becoming a Chartered Financial Analyst, or CFA. The Association of Investment Management and Research (AIMR) confer this designation on those who pass a series of examinations, which are administered in three stages. They are Levels I, II and III and are given at one-year intervals in May. To become a CFA, one must pass all three levels and also have worked for three years (which usually coincides with the testing period). The program and tests are not easy, and according to the AIMR the pass rates have ranged over the past 10 years:
Level I: 48 percent to 62 percent
Level II: 46 percent to 65 percent
Level III: 59 percent to 82 percent
The CFA designation lends the analyst respect and credibility to investors and seems more and more a prerequisite to moving up. As one analyst notes, "All things being equal, promotions will go to the analyst with his CFA examinations complete or with his MBA degree." In addition, a candidate interviewing for a research position will stand out by stating a sincere intention to complete the CFA examinations.
