Big LOs

Can someone explain to me the appeal with Big Long Only funds (Fidelity, T Rowe)? Mutual fund outflows are only increasing and these big players have massive enterprises that need to get skimmed down. I understand the career is cushy, but I struggle with squaring that with the long term outlook

I get the Argument can be made about HFs as well, but at least the upside is a bit more material

I am just curious here for thoughts and perspectives so thanks in advance

Comments (36)

  • Investment Analyst in HF - RelVal

For one it's actual investing, not the speculation game that Citadel/P72 plays. Also if you end up at a fund with a history of outperformance, especially during the 2010s, you'll learn a lot. Important to filter out the RCGs of this world with horrible performance and try being at the funds where the people leading it are genuinely smart and thoughtful investors that adapt to changing market environments.

kpx5ar4SSW, what's your opinion? Comment below:

It's just an ice cold take... Analysts at P72 and Citadel don't "speculate". They combine rudimentary data processing with basic fundamental analysis to come to obvious conclusions but I wouldn't call that "speculating". BTW, I'm not demeaning their skill set at all I just think the analyses they run aren't what makes their job difficult, it's more like the mental toil & avoiding blunders & thinking through risk properly. 

What is "actual investing"? Does it only include long term "buy and hold"? Do you think Peter Lynch or Buffett wouldn't take an arb if they saw one available?  

Most Helpful
kpx5ar4SSW, what's your opinion? Comment below:

Positive features from prospective analyst's perspective:

  • Much less key man risk than a single manager or even most multistrats
  • Much less risk that your job & net worth go poof because of 1-2 bad investments
  • Partnership and/or publicly-traded company models lend themselves better to participating in the company profits and therefore having your personal worth compound moreso than the annual mercenary model of most L/S funds 
  • Lots of people to network and learn from
  • Contrary to outside perception, the mutual fund businesses are still very much growing in terms of fees (check out Invesco, T Rowe, Franklin Templeton (all public)), especially fees per employee so while fee compression is important, it is still, and likely for the foreseeable future, less than the positive revenue tailwind of 8-10% long term AUM growth. Meanwhile, the passive to active flows that drove this fee compression are beginning to level out i.e. passive has already gone from 0% to 50%, who knows whether the plateau is 70% or 85% but its certainly not 100% therefore that headwind is probably in inning 6 or 7 at this point.

Negative elements:

  • Tenure / leveling up model means you have to put up with "get rich slowly" i.e. no real path to $10mm+ net worth in your 30's because you in all likelihood won't even be running your own product (which is when the real money starts) until you're 40.
  • IMO, a) the coverage model of analysts and b) the closet indexing diversification model most funds (not all, but most) pursues seem like a mediocre way to invest. It's impossible to generate significant alpha if you're more or less following the same process as every other fund in your category.
  • Lots of constituents = lots of bureaucracy, similar to working at a large bank

An Analyst seat at Wellington, T Rowe, Fidelity, Capital Group is still one of the best gigs on wall street and probably the single highest probability path to a $20mm net worth by the time you're 50 in the game. 

  • Intern in IB - Gen

Also interested in some that take experienced hires (I.e. select equity) in how they compare to big LO shops. Also if there are others like select in terms of being LO + background of investors

  • Analyst 1 in PE - Other

Definitely also feeling the fee compression + rough couple years for fixed income but they're doing a huge push into alternatives and they have 80 MDs/Partners that split 30% of the firm's profits so on average $5mm+ each. 

Obelix99, what's your opinion? Comment below:

Tenure / leveling up model means you have to put up with "get rich slowly" i.e. no real path to $10mm+ net worth in your 30's because you in all likelihood won't even be running your own product (which is when the real money starts) until you're 40.

I have noticed that the model is a lot more traditional in the sense that you need to put in your time. However, don't you think that (assuming you start as an analyst at 25) 15+ years to run your own product is too long of a timeframe? 

  • Associate 3 in IB-M&A

I'd echo the above. Most people come in as analyst in the 29-30+ range usually from MBA programs. I'd say the road to managing capital at a classic fund like Fidelity is close to 10-15 years of proving yourself as a analyst. It makes sense too, why would they trust somebody with less experience to manage billions of pure beta exposure. Positioning and risk adjust is one of the most  important things required to succeed as a PM and somebody with less than 10 years of experience just doesn't have as much PM exposure or understanding diversified industries. 

ke18sb, what's your opinion? Comment below:

In my opinion it doesn't. You still need juniors to ultimately fill the pipeline of seniors. The job is an apprenticeship. 

While not entirely apples to apples...I'd point to outsourcing of IB and MBB tasks to India. In the early 2000s (I'm sure there posts on here) people were saying those seats were going to crush analysts classes. They didn't. If anything it will likely just make juniors more efficient with time to do more analysis. 

  • VP in AM - Equities

Fairly obvious what the appeal is:

- Make very good money with decent career stability, interesting job (actual investing, researching companies), OK WLB. 

- You won't get fired if one PM loses money or decides he doesn't like you (unlike MM HF).

- There are headwinds for the industry, but T Rowe will be around far, far longer than the median HF career. 

  • Associate 1 in PE - LBOs

Grew up with a parent at one of the big LO shops (Fidelity, Wellington, etc) so can offer some perspective on the pros -

  • It's a great career seat. You rarely hear about anyone getting fired, especially once you're a PM. You eventually get pushed out if you underperform in the long run, but it's a far safer seat and a bad call (or more than one) doesn't land you on the hot seat.
  • comp isn't as variable as a HF but it scales very consistently and there is a much higher ceiling than many think. You won't make 10M at age 30 but if you end up running a big fund comp can scale astronomically and well into the 8 figure range. And this is also driven off % of AUM fees, so you can just match your index and cash massive checks.
  • "long term" investments take the pressure off the playing quarters game and you have the ability to look at the 3-5 year range rather than 2-3 quarters.
  • WLB is impressive given comp. I would argue the absolute best seat in finance for $/hour worked.
MMPM, what's your opinion? Comment below:

Yeah it puts you on a path to $5m+ / year, but you need to pay $150k upfront.

And you say you're good at investing?

  • 4
  • Research Analyst in HF - EquityHedge

Your reasoning could only be valid if : 

1) everybody could enter/pay a $150k MBA program

2) all MBA students could integrate a top LO fund right after the program

3) all analysts/PMs integrating a top LO post-MBA would be guaranteed to make at some point $5m+/year

4) the money you spend today has the same value than the money you'll potentially earn in decades

Lots of discounting factors "MMPM" but yeah !

  • 3
MarcBahamas, what's your opinion? Comment below:

No other industry where you are literally paid to underperform.

  • 10
ke18sb, what's your opinion? Comment below:

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Northshore20, what's your opinion? Comment below:

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