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Purchasing Power Parity

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Most all buy side shops have fixed income funds. For those interested in equity buy side, may want to look into High Yield/Distressed credit. ... – PowerPoint PPT presentation

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Title: Purchasing Power Parity


1
Fixed-Income Buy Side, Sell Side, and Research
Opportunities
2
Why should you consider Fixed Income?
  • Buy Side
  • Buy side is difficult to break into, thus why
    limit yourself to equity buy side shops.
  • Financial analysis is similar for both credit
    fixed income and equity.
  • Research
  • Equity research has been affected by over
    regulation (i.e. hardening of the Chinese Wall).
  • Fixed Income research is less regulated and gives
    individuals opportunity to have exposure to Sales
    and Trading.
  • Great intermediate step to ST, Buy Side, or
    Corporate Job.
  • Sell Side ST
  • Majority of firms do not hire separately for
    fixed income and equities.
  • Once hired into a ST program, will be exposed to
    both equity and fixed income.
  • May be helpful to understand basic fixed income
    for interviews.

3
Buy Side Fixed Income
  • Buy side fixed income firms are structured
    similar to most equity buy side shops.
  • Portfolio Mangers and Research Analysts They
    decide on investment decisions such as which
    corporate bonds to buy.
  • Traders They contact and receive offers from
    the sell side and analyze market color and
    conditions.
  • Differences between buy side fixed income and
    equity
  • Many more products including non-corporate
    instruments such as Municipals, MBS, ABS, and
    Treasuries.
  • Most equity shops have teams or individual
    portfolio managers who are responsible for
    industry specific funds. This is rare on the
    fixed income side.
  • Much like managing a specific sector of the
    equity market (i.e.. small cap equity), fixed
    income PMs manage portfolios based on either
    product (MBS), credit quality (High Grade vs.
    High Yield), maturity (short duration vs. long
    duration), and region (Europe vs. Emerging
    Markets).

4
Buy Side Fixed Income (contd)
  • Typical Buy Side Fixed Income Funds (Source
    Morgan Stanley Investment Management)

5
Buy Side Fixed Income (contd)
  • Majority of PMs graded against Lehman and Salomon
    Indices (Source Lehman Brothers)

6
An Example on How a Fixed Income Buy Side Shop
Might Operate
  • Teams are separated into three main groups
    Credit, Non-credit, and interest rates.
  • Credit group, including High Yield and High
    Grade, make bets on individual companies. Those
    interested in equities may find opportunities
    here.
  • Non-credit group manages portfolios of MBS, ABS
    and non-corporate related securities. Highly
    quantitative folks should look into positions in
    this area.
  • Interest rate team works with both groups to set
    duration decision for all the portfolios. Thus,
    will work with credit group to decide value
    proposition on buying longer or shorter
    maturities. Work with MBS group to manage
    interest rate risk while monitoring issues
    dealing with prepayments and other product
    specific issues.

7
Fixed Income Firms
  • Most all buy side shops have fixed income funds
  • For those interested in equity buy side, may want
    to look into High Yield/Distressed credit.
  • Some of the largest and most prestigious firms
    include
  • Pacific Investment Management Company (PIMCO)
  • BlackRock
  • Trade Company of the West (TCW)
  • Western Asset Management Company (WAMCO)
  • Fidelity
  • Vanguard
  • Morgan Stanley Investment Management
  • J.P. Morgan Investment Management

8
For you equity buy side folks..
  • High Yield and Distressed Fixed Income securities
    are very equity like thus an equity type analysis
    is required.
  • For example, many buy side funds (especially
    hedge funds) invest in distressed bonds thus end
    up owning a majority share of companies coming
    out of bankruptcies.
  • Examples include
  • K-mart ESL and Third Avenue Funds bought
    majority of distressed securities prior to the
    K-mart bankruptcy and had majority ownership of
    the equity of the company coming out. Fixed
    income analyst was responsible for the investment
    decision.
  • Adelphia WR Huff Asset Management is one of
    Adelphias largest Bond holders (BW article June
    14, 2004).
  • These are just examples. There are many firms
    out there with potential opportunities thus cast
    a wide net!

9
Fixed Income Research (contd)
  • Those interested in Equity Research should
    consider Fixed Income Credit Research
  • Similarities
  • Similar types of financial analysis. More
    balance sheet driven when looking at High Yield
    and distressed companies.
  • Must understand industry industry trends,
    competitive position (porter type analysis), and
    future prospects.
  • Must understand the fundamentals of a company
    cost drivers, balance sheet (key for high yield),
    leverage and coverage ratios, debt covenant
    analysis, legal and earnings analysis.
  • Writing Involved (but less, definitely a plus)
  • Analyst are separated into industry groups
  • Analyst on fixed income side are also worried
    about those Institutional Rankings

10
Fixed Income Research (contd)
  • Those interested in Equity Research should
    consider Fixed Income Credit Research
  • Differences
  • The analysis is less story telling and more
    fundamental analysis. Dont really care about
    the upside just want interest payments.
  • Must analyze separate bond issues unlike equity.
    Thus must understand priority claims and maturity
    issues (relative value).
  • Less Restrictions on Fixed Income Analyst. Thus
    analysts are usually on the trading floor working
    with Sales and Traders
  • Many analyst cover several industries.
  • Many firms compensate analyst on performance of
    the trading desk.
  • Analyst make proprietary decisions which flow
    traders make. Traders are often times required
    to get clearance form analysts.
  • If there is a proprietary trade, analysts are not
    allowed to publish.
  • Hours are more similar to ST but worse.
  • This position definitely sets one up for buy side
    firms.

11
Fixed Income Research (contd)
  • There are many other opportunities on the
    non-credit side of the business
  • They include MBS, ABS, derivatives (CDS), and
    interest rate research. Outside of the credit
    realm, more quantitative individuals are needed.
  • How do I get into Credit Research?
  • Most firms go through their ST program.
  • Lehman separated their credit research last year.
  • Be sure to understand if a firm values their
    research. For example, many firms are cutting
    research across the board. Others have research
    as part of their corporate strategy.

12
Specifics on Credit ST
  • Ask about the requirements to get into credit
    Sales and Trading.
  • Many firms require associates to go through
    research for 1 to 2 years before getting on a
    credit desk.
  • Like previously stated, understand what is going
    on in the credit markets.
  • Margin compression not as severe as equity
    markets due to the lack of liquidity and
    efficiency.
  • The derivative markets are becoming essential to
    the .
  • Bonds are boring? But markets can be volatile.
    For example in 1998.

13
Fixed Income ST
  • Most firms are hire into a generalist pool and
    then figure which desks you will go to. Thus,
    even if you dont want fixed incometoo bad.
  • Over the past few years, fixed income markets
    have been hot, thus fixed income desks have
    continued to establish themselves within
    investment banks.
  • Bonds sound boring..but markets can be volatile.
    For example in 1998.
  • When going into the business, understand what you
    want and know where the business is going (issues
    dealing with margin compression). Some areas are
    worse than others.
  • Ill leave issues for ST to the finance club.
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