Purchasing Power Parity

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Fixed-Income Buy Side, Sell Side, and Research
Opportunities
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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.

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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).

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Buy Side Fixed Income (contd)

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

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Buy Side Fixed Income (contd)

• Majority of PMs graded against Lehman and Salomon
  Indices (Source Lehman Brothers)

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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.

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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

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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!

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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

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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.

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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.

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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.

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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.