What to Expect in Your Asset Management Internship at a Pension Fund or Endowment
If you want to work in a buy-side role, is investment banking a pre-requisite?
There seems to be an obsession with it online, but for many roles, it’s optional.
The best example is in institutional asset management, where you can win internships and full-time roles without stepping foot into a bank.
If you want to invest in the public markets, why bother?
Our reader today came to the same conclusions, won a series of asset management internships, and wanted to share his experiences doing so:
Breaking into Asset Management: Becoming a Team Player
Q: Can you start by explaining how you became interested in asset management?
A: Sure. I grew up in a Midwestern state of the U.S. that was hit hard by the last recession, and I didn’t understand how something in the news that seemed so far away could hit so close to home.
I wanted to learn how all the events fit together, and I realized finance was the industry for me after taking my first class in it in high school.
I attended a well-known university and planned to get into investment banking initially.
But after learning more about it, I realized I wanted to follow companies and invest in the public markets rather than working on deals and long-term projects.
So, I interned at an asset management firm that worked with pensions, endowments, and ultra-high-net-worth (UHNW) individuals.
Then, I used that experience to win another internship in the investments division of a large asset management firm in a major financial center.
Q: OK. Before we dive into the recruiting process, how can you find asset management firms that hire interns?
A: The large asset managers, such as BlackRock, Vanguard, and State Street, and the large banks, such as JP Morgan, Goldman Sachs, and Credit Suisse, all have internship positions.
The banks typically don’t advertise the internships as “institutional asset management,” but simply as “general asset management.”
Google searches (e.g., “asset management Tulsa”) work surprisingly well for finding boutiques and regional firms, but if you can gain access, Capital IQ is the best way to find these companies.
Mid-sized banks rarely hire interns, so you should aim for large banks or large asset managers if you have work experience, or regional firms if you’re just starting out.
Q: Thanks for clarifying that.
What qualities do asset management firms look for in interns?
A: The top three criteria are:
1) Involvement in Team Activities
They want to know that you can work with others since the work is heavily client-based, and you’ll be working with industry-specific teams all the time.
Joining an organized sport, participating in a large organization, doing volunteer work, or serving as a mentor could all help your case.
2) Technical Knowledge of Investments, Derivatives, Economics, and Accounting
Asset management is much broader than investment banking, so you need to know a bit about everything.
A banker wouldn’t care about whether or not you understand trade policy, but it could easily come up in AM interviews.
And accounting and valuation/DCF analysis are essential in both industries.
3) Internships in Wealth Management, Asset Management, Hedge Funds, or Trading
You can demonstrate your enthusiasm for investing via other means, such as your personal account (“PA”), but nothing beats work experience.
Q: Great. How does the recruiting process for internships work?
A: For juniors (penultimate-year students), the recruiting process begins in October and ends in February, which is later than the one in IB.
But the timing varies greatly between firms, more so than in banking.
The first round consists of HireVue questions (you record yourself answering questions in video format online, and then they review the recordings) or a traditional phone interview.
Questions tend to be mostly behavioral – Why this firm, strengths/weaknesses, and leadership skills – but some technical questions will also come up.
Technical questions for AM firms cover accounting; DCF analysis; market knowledge of major stock indices, treasury rates, and yields; and portfolio management.
You are unlikely to receive questions on public comps, precedent transactions, leveraged buyouts, or mergers & acquisitions.
The “portfolio management” questions are the trickiest because there isn’t one centralized source for studying them.
The topics range from defined contribution vs. defined benefit pension plans to CAPM to risk preferences and asset allocation.
If you pass this first round, you might have to take an online test where you answer questions about how you’d deal with clients in difficult situations.
For example, they might ask you how you would respond to a client whose portfolio just declined by 5% in the past quarter, and what you would do to ease his/her concerns.
The math and logic tests common at assessment centers in the U.K. are unlikely to come up; qualitative questions are more common.
Q: I’m already tired. What happens next?
A: If you pass the first round and the online test(s), you advance to the final rounds, which are similar.
But you will speak with senior team members, and you’ll have to answer more technical questions and “on-the-spot” case studies.
For example, they might ask you, “You have a 70-year-old, risk-averse client. How would you build his or her portfolio?”
And you have to go back and forth with the interviewer, asking clarifying questions and explaining your thought process.
So, in this example, you might ask what his/her existing portfolio looks like, how much money he/she has to invest, and the amount he/she needs to live on each year in retirement, and then go from there.
Finally, if you’re interviewing at a pension fund or endowment, be prepared for questions on asset allocation specific to those institutions.
For example, you need to know the liquidity requirements and risk profiles of the firm, and if there are specific strategies that it cannot pursue.
On the Job as an Asset Management Intern
Q: Thanks for explaining all that.
On that note, can you explain the differences between endowments and pension funds, and how asset management differs as a result?
A: The main difference is the centrality: Endowments represent incomes and monies given to a university for operational items or other relative actions.
But pensions represent employees’ benefits from working at a certain corporation.
As a result, endowments tend to use longer-term strategies and have a higher risk tolerance; there’s no pressing need to pay retired employees, so they can be more aggressive.
The exact allocation depends on the Portfolio Manager (PM), but many large endowments invest in a combination of equities and hedge funds.
Endowments used to focus on bonds and other fixed-income-like assets such as REITs, but they have shifted to equities because stocks have outperformed bonds in the long run.
The strategy at a pension fund depends on whether it’s a defined benefit (DB) or defined contribution (DC) plan.
DB plans promise to pay employees a certain amount each month in retirement based on their position at the company and years of work experience; with DC plans, employees “contribute” a certain amount from their paychecks and choose how to invest it.
DC plans have become more popular over time because there are no guaranteed payments in retirement, which greatly reduces the risk for the company.
Individual employees have more say in DC plans, so these plans also tend to invest more in equities and mutual funds.
With DB plans, there’s usually an External Manager or Treasurer who allocates the pension funds into a wider variety of assets.
For example, the Treasurer might build a portfolio consisting of bonds, REITs, non-REIT equities, hedge funds, and commodities.
There is less variety in most DC plans.
Q: OK. And what does all of that mean for an average day on the job?
A: As an intern, I spent 70% of my time on portfolio construction and 30% on client-facing meetings.
“Portfolio construction” meant finding different stocks, bonds, ETFs, closed-end funds, and open-end funds to fit into whatever portfolio was assigned to me.
I had to create make-shift portfolios of 100-500 assets each and give the drafts to my manager, who said “Yes” or “No” to each asset.
When he finished, each portfolio had 50-80 assets.
This exercise is called a “term project” because it takes 2-4 days to complete and consumes all your hours in that time span.
For the client-facing meetings, I went with my manager and team to visit current and prospective clients, with performance updates for current ones and pitch books for prospectives.
As in sales & trading internships, interns cannot make trades or directly speak with clients because they don’t have the Series 7, 63, or any other certification such as the CFA.
So, you usually spend your time as an “idea person” if you’re completing an internship.
Overall, I liked the experience quite a bit because there was more real work than in many S&T internships, and I didn’t have to focus on networking with all the desks.
The downside is that I didn’t get as much direct exposure as IB interns do.
Q: Great. And what are you planning to do in the future?
A: My long-term goal is to become a Portfolio Manager in institutional asset management, so I’m currently preparing for the CFA Level 1, Series 7, Series 63, and the CAIA and CFP; I might also consider an MBA in the future.
I hope to win a full-time return offer from my next internship, but if that doesn’t work out, I’ll recruit for AM roles elsewhere.
Q: Of all those degrees and certifications, the MBA probably makes the least sense for you…
Anyway, thanks for your time. Do you have any final thoughts for students considering asset management?
A: Don’t be scared off by the less structured recruiting process, or by the fact that you’re not going into investment banking first.
In some ways, it’s a bit easier because there’s less competition: All the students in the “I don’t know what I want to do” category tend to default to banking.
Also, don’t be lazy: It is worth spending the time and effort to obtain certifications like the CFA here.
Q: Well said. Thank you!
A: My pleasure.
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