Equity researchers, or analysts, are often the talking heads of the investment banks. When bank offers an opinion on a particular company or stock in the press, it’s usually the specialist analyst covering that sector who gives a view.
Researchers spend their time focusing on large-cap companies, generating investment ideas for clients on the ‘buy-side’ (namely big fund managers). While they spend time producing reports, poring through company financials and giving occasional views to the media, much of their job is spent doing more fundamental research that will set them apart from their competitors.
They’ll speak to company CEOs, CFOs and investors to get an idea of both sector sentiment and the specific prospects of a company, as well as creating complex financial models to predict the earning potential of particular firms.
The idea is to encourage big investors to then trade particular stocks through the sales and trading teams of the bank the analyst works for. Most cover large companies, which create the greatest investor appetite, but smaller investment banks also cover attractive mid-sized firms. There can be up to 25 analysts covering the same stock, so focusing on more niche companies can give smaller banks an edge.
Equity research is much less hierarchical than other areas of investment banking; teams are small and it’s more about the ideas you generate (and their performance) than your job title.
Researchers focus on industry sectors, such as technology or financials, and then a specialism within that – say, hardware or banks – and each sector team will cover around 15 companies. Initially, you will be given the role of associate, of which there are two-three on any team. They cover a few stocks within the sector team, and do a lot of financial modelling, but it’s the senior analysts – namely those with their names on the report –who get the credit.
Then, it’s a case of gaining the respect of the industry and your peers by making both correct and original calls. Top-ranked equity research teams can bring in a lot of business to banks’ trading desks, and analysts are more likely to be headhunted by another investment bank, or a hedge fund or fund manager.
One of the most common exit opportunities for equity researchers in investment banking is to move to the buy-side. Primarily, this has involved taking an analyst role in a hedge fund, where you would make investment recommendations for the fund's in-house portfolio management teams. In hedge funds, analysts are often called 'idea generators'. Increasingly, though, equity researchers have been making the move into institutional fund managers, which again involves making recommendations to their in-house investment teams. Equity research hasn't been the most stable career within investment banks in recent years, and the buy-side can offer greater job security.
Banks expect research candidates to come armed with the same mathematical prowess as those entering other front office roles, but you need more. “A good research analyst combines strong quantitative and analytical acumen with an ability to see and tell the ‘story’ reflected in a company’s numbers,” said Lisa Thomas, managing director co-head of Americas Equity Research, Nomura. “Their ability to “get into the weeds” is highly valued by clients, whether it is applied to a company’s financial statements, industry data and trends or is focused on some other element of company performance or industry drivers.”
Not only must you be able to assimilate complex data points and translate them into clear themes for investors, you need to have great communication skills to liaise with various parties (investor relations professionals and portfolio managers, for instance) in order to develop “abroad mosaic view of the company’s prospects for future performance,” said Thomas.
“We require our analyst teams to have independent, commercial and actionable ideas. This needs to be combined with robust analysis, conviction and integrity," added Xavier Gunner, deputy head of equity research, EMEA, HSBC.