I am working as a research analyst in a very small firm, so I would like to gather some info about the large picture.
For RA in big AM firms, how many industries and companies one normally covers?
Also, if one aims to be a PM in the long term, should one rotate the industries covered to profoundly understand the whole market?
i wanna be pM
Research analyst at bigger firms typically are more focused, simply because bigger firms have more bodies. So at a small firm one could be a generalist, and at mega firm like Janus, Federated or Invesco there will be 3-4 guys just covering technology. So each person has a subsector focus - software, hardware, US vs international, etc. This is true across big firms, unless the firm is adamant about having a generalist approach to investing, like Thornburg.
In terms of what it takes for a research analyst to get a PM role, the generalist approach is actually better. To get to PM, typically it’s 1) multiple industry coverage after 5-6 years, and 2) demonstrated interest and awareness of macro and portfolio risks beyond just one industry. For example, for an international fund a PM would think about currency/sovereign risks beyond just industries. VIE risk for China investments is another example. On the US side, an example would be how large the impact Obamacare has on the portfolio – it would not only impact healthcare providers, but also labor costs for retailers.
Thanks, KJ. Very good explanation! Well, so the first step is to get my foot into a large firm!
The big money is made by generalists. That doesn’t mean you can’t be a successful industry specialist, but consider that industries come in and out of favor over multi-year cycles. What are you supposed to do when your industry is very overpriced? Maybe you work at a long only shop, then you’re stuck. It could also be that there are few if any undervalued stocks in the industry you cover at a specific time, leaving you with limited value add.
In contrast, there can be industries where many of the stocks are mispriced all at the same time, providing a fat pitch if you are looking in the right place.
It’s hard to be good at all industries or sectors. In the CapIQ system, there are 154 primary industry groups. I’ve never specifically counted, but after 8 years as a generalist I probably have good familiarity with 80-100 of these. That doesn’t mean I’m an expert at any of them, but I could figure them out. Other industries, like banking and most of biotech, I am pretty much useless at. I am very strong at pretty much all industries within industrials, consumer products, and service companies because those make the most sense to me and seem the most predictable.
If you’re good at many (or preferably all industries in a perfect world), it broadens the selection of equities you can focus on and also gives you something to do at all points of the cycle. I also think it makes you a much better investor overall – who is going to be more skilled, the generalist who has looked at hundreds of stocks over his career or the guy who has followed 6-10 stocks for years? If you are tempted to answer the latter, consider that no matter how much you might be able to learn about a specific industry, any company / industry only has 3-5 key swing factors, and you are never going to be able to nail down the industry with certainty no matter how much you know.