Industry Overview: Industry Analysts - The New Masters Of The Universe?
A little background
So you want to be an industry analyst. But first, what does that mean? What do those guys do anyway? Industry analysis encompasses research, financial analysis, communication and writing. The objective of all this activity is to assess industries, companies, and securities in order to determine which ones present the best investment prospects. Industry analysts are employed in a variety of functions for different types of firms. Analysts are generally classified according to whether they work for investment banks and brokerage houses, or for institutional investors. Those in the first situation are called sell-side analysts, and they typically use their research to attract new business from institutions, wealthy individuals and/or to promote and service existing clients. Those in the second group are called buy-side analysts. Their main function is to identify investment opportunities for institutional investors such as investment management firms, pension funds, insurance companies or mutual funds.
Industry analysts may follow debt or equity securities a combination of the two. An analyst usually follows several companies within a particular industry or industry sector, though some analysts cover multiple industry sectors. Analysts are often viewed as experts in their sectors and on their companies. However, becoming an expert requires keeping abreast of, (and preferably ahead of) industry developments. This means reading trade magazines or newspapers; subscribing to newswire services, keeping in close and frequent contact with companies via analyst days, conference calls and field visits; and to a greater or lesser degree, interacting with counterparts at industry conferences and other events.
On the sell-side
Industry analysts, particularly on the sell-side, have received more prominence on the Street in recent years as investment banks recognize the significant impact that highly visible analysts can have in bringing in new business. Accordingly many sell-side shops have begun to integrate their analysts more and more closely with their investment banking teams, using them to help identify and cement potential new client relationships. Despite their glamour and impact, however, sell-side analysts have come under increasing criticism because of the perception that conflicts of interest are inherent to their jobs. In short, they deliver investment recommendations concerning the securities of companies that are existing or potential clients of their employers.
~ Many believe that this prevents them from objectively voicing their opinions on the securities of the companies they follow. This belief is confirmed by the rarity with which sell-side analysts issue "sell" recommendations. Publicized instances of analysts losing their jobs or suspected instances of client retaliation (e.g., companies refusing access to analysts who issue negative or unpopular recommendations and/or limiting business with their firms), only add fuel to the accusations.
On the buy-side
Buy-side analysts are far fewer in number than sell-side analysts and can be employed by mutual fund companies, hedge funds, insurance companies, pension funds, or other investment management companies. Buy-side analysts perform the same analytical functions that sell-side analysts do, however, their clientele are largely internal, i.e., their company portfolio managers. This is in contrast to sell-side analysts whose research is geared to investors, particularly large institutional ones. In fact, buy-side analysts often rely partly on sell-side research. More and more people have become drawn to the buy-side as the record stock market boom spawns more and more mutual funds, hedge funds, and ever more exotic funds focused on specific sectors or asset classes.
The ratings game
Ratings agency analysts make up a third type of industry analyst. Their principal function is to serve the investment community by issuing credit rating opinions, as opposed to investment recommendations, on public and private debt fixed-income securities including bonds, syndicated loans, project financings, and derivative securities. Ratings agency analysts may have an industry or sector focus, or they may follow specific categories of debt instruments such as asset backed securities. Though ratings agency analysts do not receive the same attention in the press that highly visible sell-side analysts do, their ratings do have a tremendous impact on the liquidity of the debt instruments they rate.
It's all about the skills
Successful analysts need to be able to both anticipate as well as react quickly to industry and company developments. They must have strong quantitative skills to create and interpret financial models and develop projections as well as scrutinize and deconstruct financial statements. A shrewd analyst is detail-oriented and sees past accounting gimmickry to understand a company's true economic condition and prospects. Lastly, communication skills - both written and oral - are key. Analysts make presentations to potential clients, investors, and portfolio managers and must also publish frequent industry and company reports. Analysts must be persuasive and on point in order to develop a reputation. A thick skin also comes in handy as they frequently come under fire from companies, investors, or their peers for unconventional and/or unpopular calls. Though the hours can be long and the work can frequently involve travel, the rewards can be great. Successful analysts can earn in the hundreds of thousands, to millions of dollars a year. Highly regarded and well-known analysts receive a great deal of media coverage. Several organizations publish annual rankings of industry analysts based on the accuracy of their investment recommendations. The most prominent of the analyst rankings are those published by Institutional Investor magazine and The Wall Street Journal. Analysts who make the rankings can bring in millions of dollars in new business for their companies and for themselves.
Just as there are different types of analysts, there are many different ways to get into the field. Connections, familial or other, are of course a standard means of entry. However, more and more organizations, especially sell-side ones, are recruiting at MBA programs. Several sell-side firms also have equity analyst training programs. Some buy-side companies, most notably Fidelity, recruit analysts right out of undergraduate programs and train them extensively. However, the sell-side offers more positions, particularly for those with less experience. In fact, one route to becoming a buy-side industry analyst is to spend several years working on the sell-side first. Other means of entry include experience working in a specific industry or with a specific asset class. Lastly, as the field becomes more and more competitive, qualifications such as advanced degrees and certifications, such as the CFA (Chartered Financial Analyst) are becoming prerequisites for entry.
So if you think you have what it takes to be an analyst, go for it! With more and more companies expanding their research staffs and non-traditional players such as Charles Schwab moving to enter the field, the timing could not be better.
Deborah Adeyanju works as a credit analyst in New York City.