Investment banks' analysts are not flooding to the buy-side, says T. Rowe Price director of research
Steph Jackson, the director of equity research for North America at T. Rowe Price, now manages 90-plus research analysts in the asset management giant’s Baltimore headquarters, where he’s worked for a decade. He started out on the sell-side, but despite the gloom surrounding equity research in investment banking, he's not being deluged with resumes.
“As an investor, I learned a long time ago not to assign certain outcomes with the wrong set of causation,” Jackson said. “We do sometimes hire people from the sell-side if we think that person is talented and could make a good investor, but we haven’t seen a flight of resumes [from bank research analysts] trying to come over to this side."
“We would generally be looking for folks who are curious about understanding things and so dig deeply, who have a very strong work ethic and are focused on trying to get to the right answer and willing to take risks appropriately,” he said.
Asset managers are the cause of a lot of anxiety in the ranks of sell-side analyst. They've always been key-clients, but the 'unbundling' of research costs under MiFID II regulations in Europe mean that the buy-side will have to pay for the research it uses. Right now, most investment banks don't know how to charge for the research, and a lot of asset managers are cutting their budgets in this area anyway.
“The history of having an all-in-one approach to paying commissions to the sell side, regulatory pressure from the FCA in the UK and MiFID II is making many sell-side shops reassess that business model, and we’re under scrutiny so we have to reassess how we pay the Street,” said Jackson. “There is still a place for firms with value-added research to partner with us as we seek out great investment ideas and create alpha for our clients, but there’s a higher level of accountability and downward pressure on pricing.”
So, who does T. Rowe Price hire? Jackson says its culture leans more toward collaboration than many asset managers, some of which can be cut-throat and individualistic.
“Within the context of our culture, we’re a very collaborative organization, which is a little bit of a paradox, because most investment personalities are very independent people in terms of their thinking and approach to investing,” Jackson said. “We need people who can share their insights and collaborate with others to make themselves and the team better.
T. Rowe doesn’t hire undergraduates unless they’ve interned with the firm and shown a real passion for investing. T. Rowe also has an MBA internship program targeting students at the top 10 business schools.
The three skills you need to have to be an excellent asset manager
Jackson says there the three skills he feels you need to have to be a great investor.
Firstly, you have to find out and understand how a company makes money. Is it a spread business or a product business? Does the company have a unique product with a patent or provide a service no one else can do? Are they profiting unsustainably from exorbitant prices, or is it a great business model?
Then, you have to identify the key performance indicators (KPIs) or fundamentals that you need to follow to understand whether the company is doing well or poorly. That means being able to interpret financial statements and understand how a business model is reflected in them. Does the company employ high levels of leverage? Does its performance fluctuate or is it steady? Is it a cyclical business or does it have secular momentum? What are these financial statements telling me about the business?
“You have to predict what they’ll look like years from now,” Jackson said.
Finally, you need to gain sufficient market experience to be able to predict how a particular stock is likely going to trade.
“That third skill very few people are able to acquire – you can only get stock-savvy through a significant amount of study and time investing in the markets,” Jackson said. “How a stock trades is never a straight line – equities bounce all over the place, and some have higher levels of amplitude than others."
Resilience also helps.
“I like someone with a bit of a chip on their shoulder who has failed,” Jackson said. “You will fail at this business a lot – if you only fail 50% of the time without blowing yourself up, then you’re a fantastic investor, so it takes perseverance and some sense of when it’s appropriate to take a risk.
“Successful investors are people who aren’t afraid to get their hands dirty,” he said.
If an interviewer or your boss asks you to tell them about a stock idea you have, don’t pick a well-known darling stock like Apple or Facebook, because everybody understands those kinds of vanilla investment ideas. A better approach? Talk about a hidden or seemingly tarnished gem.
“‘I know it’s not popular, but I found this steel stock that I think will be a fantastic investment,’” Jackson said. “Know the difference between a good company and a good investment – I’ve had candidates say that they are value-oriented investors but their investment ideas focus on high quality.
“To find value, sometimes you have to invest in a beaten-up company,” he said.