Fixed-Income:

Buy Side, Sell Side, and Research

Opportunities

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 S&T, Buy Side, or Corporate Job.

Sell Side S&T

Majority of firms do not hire separately for fixed income and equities.
Once hired into a S&T program, will be exposed to both equity and
fixed income.
May be helpful to understand basic fixed income for interviews.

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).

Buy Side Fixed Income (contd)

Typical Buy Side Fixed Income Funds (Source: Morgan Stanley

Investment Management)

Buy Side Fixed Income (contd)

Majority of PMs graded against Lehman and Salomon Indices ( Source:

Lehman Brothers)

An Example on How a Fixed Income Buy Side

Shop Might Operate:

Teams are separated into three main groups: Credit, Noncredit, 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.

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

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!

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

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 S&T but worse.
This position definitely sets one up for buy side firms.

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 S&T 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.

Specifics on Credit S&T

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.

Fixed Income S&T

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 S&T to the finance club.