Citigroup Global Markets
Careers in Finance
January 5, 2005
See the Disclosure Appendix for the Analyst
Certification and Other Disclosures.
Scott Peng
Citigroup Global Markets Page 2
PhD in Engineering / Science from MIT
What next?
What is finance?
Is finance the right career choice?
How does one break into a totally different profession?
The Basics
Citigroup Global Markets Page 3
Finance involves the selling or buying of investment instruments on behalf of either oneself or customers
Aspects of finance includes (but is not limited to)
– Interest rate analysis
– Credit analysis
– Risk management
– Portfolio theory and application
– Financial engineering
– Psychology
What is Finance?
Citigroup Global Markets Page 4
When one says finance, one usually thinks of …
– Salomon Brothers (Now Citigroup Global Markets)
– Goldman Sachs
– Lehman Brothers
– Etc, etc
But … there is a lot more to finance than just those names
Finance companies can be broadly grouped into
– Buy side
– Sell side
What is Finance?
Citigroup Global Markets Page 5
Sell side
– Investment Banks
Buy side
– Commercial banks
– Mutual funds & Money managers
– Insurance companies
Financial Institutions: The Old Days (Mid 90s)
Citigroup Global Markets Page 6
Sell side
– Investment banks
– Commercial banks
Buy side
– Finance entities
– Commercial banks
– Mutual funds & Money Managers
– Insurance companies
– Hedge funds
There’s a lot more to finance than just investment banks
Financial Institutions: Now
Citigroup Global Markets Page 7
Finance Entities
– Government sponsored enterprises – Fannie Mae, Freddie Mac
– Finance subsidiaries – GECC, GMAC, FMCC
– REITs
Commercial banks – Citibank, Chase, BankAmerica
Mutual funds & Money managers – Fidelity, Putnam, Alliance, PIMCO
Insurance company – MetLife, Mass Mutual, Aetna
Hedge funds – new kids on the block
Buy Side
Citigroup Global Markets Page 8
Invest client assets
Performance judged against benchmarks
– Equity funds: S&P 500
– Bond funds: Lehman Aggregate Index of Citigroup Broad Investment Grade (BIG)
– Hedge funds: Pure “alpha”
Key roles
– Credit analyst
– Risk manager
– Portfolio manager / Trader
– Client relationship manager
Buy Side
Citigroup Global Markets Page 9
Examples:
– Fannie Mae & Freddie Mac
– GECC, GMAC
– REITs
Invest assets versus borrowed capital to maximize return or dividend in a risk controlled fashion
Risks
– Asset-Liability Mismatch
– Credit risk
– Structural
Buy Side: Finance Companies
Citigroup Global Markets Page 10
Invest cash from
– Checking accounts
– Saving accounts and CDs
– Ongoing operations and investments
Invest to maximize return while managing risk subject to regulations
Regulation
– May invest only in bank eligible securities
– Investments subject to risk-based weighting
Risks
– Asset-Liability Mismatch
– Credit risk
– Structural
Buy Side: Commercial Banks
Citigroup Global Markets Page 11
Mutual fund managers and money managers (institutional) are not necessarily one and the same
Mutual funds: manage assets for retail investors
Money managers: Manage assets for institutional investors such as pension funds, insurance companies, universities
Major funds and money managers include (but is not limited to)
– Equity: Fidelity, Alliance Capital, Vanguard, Putnam, etc
– Bonds: Federated, Nuveen, PIMCO, BlackRock, WAMCO, etc
Manage assets versus benchmarks
– Volatility of return versus gains, slippage versus index
– Credit risk
Buy Side: Mutual Funds and Money Managers
Citigroup Global Markets Page 12
Invest cash from
– Insurance policies and annuities
Goal: maximize returns while managing risk subject to regulatory and accounting issues
Regulatory and accounting
– Capital standards and adequacy subject to state insurance commissions and NAIC
– Myriads of accounting standards and issues
– Investments subject to risk-based weighting
Risks
– Asset-Liability Mismatch (biggest)
– Credit risk
– Structural
Buy Side: Insurance Companies
Citigroup Global Markets Page 13
Been around since 1950s, exploded in popularity in last five years
Now over 7,000 hedge funds in existence
Hedge funds are grouped by their investment strategy types such as:
– Equity long/short
– Fixed income arbitrage
– Convertible bond arbitrage
– Global macro
– Managed futures
– Event driven
– Emerging market
– Private equity, venture capital and buyout (not strictly hedge fund, per se)
Buy Side: Hedge Funds
Citigroup Global Markets Page 14
Goal: Manage return versus risk (Sharpe Ratio) and minimize correlation to other asset classes
Advantages
– Work on a variety of tasks
– Relaxed, academic-like atmosphere
Disadvantages
– Relatively narrow window of expertise
– View of world is very different from non-hedge fund entities
– A lot of new hedge funds out there
Understand style and riskiness of hedge funds. Do your own research
Buy Side: Hedge Funds
Citigroup Global Markets Page 15
Commercial banks with securities subsidiaries now perform virtually the same function as investment banks
Sell side firms are generally considered as either large “bulge-bracket” or smaller niche firms
Bulge bracket: Largest investment banks
– Broadest array of equity and fixed income products
– Usually involved in most institutional trades
Niche – banks which focus on some specialties
– Mortgage-backed securities
– High yield bonds
– Equity IPO
– Financial futures
Sell Side: Investment & Commercial Banks
Citigroup Global Markets Page 16
Investment banking
– Investment banking
– Mergers & Acquisitions
Sales & Trading
– Trading
– Sales
– Strategy / Analyst
– Research
Product types: Equity and Fixed Income
Sell Side Functions
Citigroup Global Markets Page 17
Investment banking
– Grouped along industry lines – technology, insurance, finance, etc
– Understand financing needs of clients
– Work on debt and equity issuance to raise capital
– A lot of presentations and long nights
M & A
– Understand growth and longer term needs of clients
– Work on finding acquisition targets or sell unnecessary parts of firm
– A lot of presentations and long nights
These jobs mainly filled by MBA’s
Sell Side Functions: I-Banking
Citigroup Global Markets Page 18
Trading
– Make markets on securities – generally a small segment of market
– Make money trading with customers and taking positions
– Specialization: Know a lot about a relatively small segment of market
– Smoke big cigars if you’re right
Sales
– Understand client goals
– Discuss and propose trades
– Know something about a broad segment of market
Sell Side Functions: Sales & Trading
Citigroup Global Markets Page 19
Bond Strategy / Equity Analyst
– Understand markets & investors
– Discuss trades and market conditions
– Must have good communications skills – writing and speaking
Research: Most PhD’s start their careers on Wall Street here
– Quantitative bent
– Work on implementation of trading models and simulations
– Come up with new models and ways of looking at the world
– Excellent training ground for future traders/salespeople
– Can have long term career in research
Sell Side Functions: Strategy & Research
Citigroup Global Markets Page 20
Citigroup, Inc. is the world’s biggest financial services firm
Citigroup Global Markets, Inc. is the investment banking unit
Citigroup Fixed Income Quantitative Research
– Approximately 100 in the U.S.
– Approximately 250 in Global Fixed Income Research
– 40% PhDs
– Strong emphasis on quantitative aspects of fixed income
Sell Side: Strategy & Research at Citigroup
Citigroup Global Markets Page 21
Knowledge
– No, not about solving nonlinear fifth order coupled pde’s
– Read and understand the product and role for which you’re interviewing
– For example, Fabozzi’s “Handbook of Fixed Income Securities” (1373 pages) is a must-read for bond prospects
Teamwork: Show you can operate in a team environment as both a follower and a leader
– Student government
– Intramural sports
– Volunteer
Communications: Must be a good communicator
Well rounded: Have interest outside of the lab
Take business school classes to achieve a basic understanding of finance
What Makes You A Good Wall Street Candidate?
Citigroup Global Markets Page 22
Added burden of proof
– Why do you want to do this?
– Why leave science / engineering?
– How do you think what you know applies to finance?
– What do you know about what we do?
Need to demonstrate basic understanding of product
Work on having the qualifications that would make you an attractive candidate (see previous page)
Think of ways of applying the combination of technical skills and finance
– Develop a business plan for a potential new venture
– Read technical finance literature
• Journal of Fixed Income, Journal of Finance
• Risk Magazine
It Is Not Easy for PhD’s (Non-Econ) to Break In
Citigroup Global Markets Page 23
Disclaimer
ANALYST CERTIFICATION
I, Scott Peng, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views in this report.
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