What to Expect in Your Fixed Income Research Internship in London

One challenge with investment banking recruiting in London is the heavy focus on “fit.”

It benefits candidates with weak technical skills and sparkling personalities, but what if you have the opposite situation?

Maybe your technical skills are off the charts, and you’re reliable and efficient – but you haven’t climbed mountains in Japan or trained orangutans in the circus.

In that case, you might be better off looking for jobs outside investment banking and thinking about fields like asset management, especially at smaller firms.

Fixed income research might be a good fit as well, as our reader today found out:

Breaking In: How to Be a Technical Superstar But Still Fail to Win IB Offers

Q: Can you start with your story?

A: Sure. I’m from “an Asian country” originally, and I became interested in investing in high school.

I was drawn to equities at first since they were more accessible.

But in Asia, and my country, specifically, equities are often boring, and fixed income can be a more exciting field.

I won an internship at a hedge fund there, and then I did another public markets-related internship at a large bank (both won via networking).

I moved to London to complete my degree at a top university, and I planned to start out working at a large investment bank.

But after winning multiple interviews at the bulge bracket banks, I failed to win offers because I didn’t have enough interests outside of finance.

I decided to apply to non-banks and figured that I might have a better shot at boutique hedge funds and asset management firms.

I applied to a lot of firms online and was very lucky to get a response back from a well-known asset management boutique here.

I went through interviews, won an internship in fixed income research, and converted it into a full-time offer.

Q: You mentioned that the large banks focused heavily on “fit.”

What were the boutique firms seeking, and how was it different?

A: Many boutique firms want someone who already knows finance and can hit the ground running.

They always have too much work and too few people, so their general mindset is: “Find someone who knows what he/she’s doing, ASAP!”

They also don’t have the time or structured programs to train someone from scratch.

Many of the people here have prior investment banking experience, but some, like myself, have experience in other industries.

While these firms still care about fit, they won’t reject you because you’re not “interesting enough,” as large banks would.

Q: And what did they ask you about in the interviews?

A: They focused heavily on my investment ideas and which high-yield and investment-grade issuances I would recommend.

They also gave me a case study, which was fairly simple: I had to read a 2-page document describing a company and its bond issuance and then make a Yes/No investment recommendation.

As previous interviewees have pointed out, equity and debt analysis are not that different.

In both, you create a 3-statement or cash flow model with several operational cases, and you assess the key metrics and ratios based on that.

With debt, you focus on the credit stats and ratios (Debt / EBITDA, EBITDA / Interest, etc.) and assessing the chances of default; it also helps to know some of the specialized terminology, such as original issue discount.

However, the qualitative factors are very different.

In fixed income, we care a lot more about the percentage of the company’s revenue that’s recurring or “locked-in” and the catastrophic events that might kill its business.

Many people complete this type of case study and get the numbers right, but they don’t make the correct recommendation because they think it’s an equity case study (e.g., like one given in an interview for an equity research internship or equity research associate job).

For example, they’ll cite strong market growth or pricing power as reasons to invest but fail to realize that debt investors don’t benefit from higher growth.

They need to think more about the worst-case outcome, and whether or not certain events could make a company miss its interest payments.

Fixed Income Research Internships and Careers

Q: Thanks for explaining that. What was the internship like?

A: I split my time between looking at new issuances (which I found more interesting) and monitoring our existing positions.

I did the same work that the full-timers were doing: We analyzed syndicated loans, leveraged loans, high-yield and investment-grade issuances, and then made recommendations.

The case study I just described is similar to what we do on the job: Create different operational scenarios for the company, such as Base, Upside, and Downside cases, and assess the likelihood of a default.

But a lot of the work is more qualitative. In fixed income, we care more about macroeconomic and industry trends and how those impact a company’s revenue and cash flows.

So, you will not be working in Excel 100% of the time, or anything close to that.

Also, the legal side is huge. We have an in-house lawyer to review loan documents and covenants and identify conditions that might be out-of-line with market loans and rates.

These documents are long, boring, and confusing to read through, so it’s essential to have a full-time legal team involved.

They do the work, but everyone is still expected to understand the jargon and concepts and to do some of the required reading.

Q: Thanks for that overview.

What about fixed income research at asset management firms in London as a whole?

And what’s your take on starting at a boutique vs. a larger firm?

A: Asset management in London has been thriving, but it’s unclear what will happen in the aftermath of Brexit and EU-related troubles.

There are quite a few AM boutiques here, but the big firms, like BlackRock, Fidelity, and M&G, all operate fixed income research divisions as well.

A significant difference between large firms and boutiques is that at large firms, you are likely to be looking at the same companies and issuances over and over again (e.g., Coco-Cola’s corporate bonds), which can get boring.

But at smaller firms, you are more likely to do work that only senior team members at larger firms would do.

And even though the investments are smaller, they’re often more interesting to analyze because they’re more likely to be mispriced.

The main downside to fixed income research is that hiring sometimes slows to a crawl, and it doesn’t operate in cycles the same way IB/PE recruiting does – you have to apply at exactly the right time to have a chance.

Fixed Income Research Exit Opportunities

Q: Right. And what do professionals there usually do in the long term?

A: People tend to jump around a lot, but it’s usually in the direction of “Big Firm to Small Firm.”

If you want to move to a hedge fund, your exit opportunities depend heavily on the issuances you’ve covered.

You’ll get more opportunities if you cover high-yield bonds because many special situations and distressed funds invest in them as well.

Investment-grade bonds are more straightforward to analyze, and fewer hedge funds focus on them.

If you’re already in asset management, you have little incentive to move back to sell-side roles because the hours and work are better here.

The base compensation for sell-side roles is sometimes a bit higher, but total compensation is not.

Since the fixed income skill set is specialized, few people leave the industry completely; even if they switch firms or jobs, they still end up doing something credit-related.

I have seen some people move into consulting roles, but distressed and special situation hedge funds are the most common exit opportunities.

Distressed private equity is theoretically possible, but may be tough at firms that focus on deals rather than short-term trades.

Q: And is that your plan as well?

A: I’m not sure yet – I would like to return to Asia in the future, but London is a better place to gain work experience and build a network.

I might consider moving to a hedge fund if I find the right opportunity, but right now I’m quite satisfied with this role.

Q: Great. Did you want to add anything else that we haven’t already discussed?

A: I was very, very lucky.

Few asset management firms hire entry-level candidates with no previous full-time work experience.

In most cases, you’ll need something else to win this type of role – capital markets work at a bank, credit rating agency experience, or corporate banking, for example.

The big firms like BlackRock and Fidelity have proper IB-like classes of junior analysts without full-time experience, but it’s incredibly difficult to win those roles.

If you’re serious about this path, find smaller/newer firms that might need additional employees, and network your way in.

Q: Thanks for adding that, and for your time.

A: Sure! I’m happy to contribute.