Some people told me that a 5-7 years ER experiences will potentially take you to a PM role. I am wondering if there is any position between them. A senior research analyst?
And what exactly link a research analyst to a fund manager? I assume that within this 5-7 years, the research analyst covered a variety of industries/sectors. In that way he/she will know how to diversify the capital. Am I right?
Securities analysis and portfolio management are two related-but-not-identical skills, and that means that someone can be substantially better at one but not good at the other. Analysis is looking at an individual investment and figuring out if it’s a buy or a sell, i.e. is the potential return worth the risk. Portfolio management is about figuring out which of many possible investments to include in a portfolio, how to manage the total portfolio risk via appropriate hedging and diversification. Sometimes an investment may be a great buy on its own, but it somehow not appropriate for a portfolio, though the more likely case is to include a less stellar security because of diversification potential.
Since these are different skills, some people find they are good at company analysis, but then find that they are less skilled about composing the portfolio, or vice versa. So larger shops can have senior analysts that have decided not to do portfolio management, but stick with analyzing companies, because they feel they add more value there than in portfolio management. I haven’t seen recent numbers, but the last time I checked, senior analysts can make around the same compensation as portfolio managers. So it’s not quite as glamorous to be a senior analyst as a portfolio manager, but it can pay about the same.
In smaller shops, there tend to be fewer roles for senior analysts - junior analysts either get promoted to PM or eventually go elsewhere.
When ideas come up for what to put into a portfolio, they can either come from the PM itself, or the PM can just ask the analyst what they have been looking at on their own, and typically a shop will have a standard method, such as a screen to identify possibilities. In either case, the PM will generally ask the analyst to perform a deeper dive, because there’s enough work involved in various PM-specific tasks that if the PM did a full due diligence on every idea, there wouldn’t be enough time to manage the portfolio risk, client requests, reporting, and all the other stuff that PM requires. So sometimes a senior analyst is like a co-pilot for a PM who simply concentrates on a particular part of the investment process.
If you are better at PM than analysis, then it’s harder, because few people are allowed to manage a portfolio without demonstrating that they are good at analysis, at least in fundamental shops. Quant shops can be different, though, because security analysis often amounts to running regressions or something like that.
Thanks so much for such a comprehensive explanation. That does help me with my question. I think I am focusing on fundamental. In that way, to demonstrate research ability in an analyst role sounds essential.