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Slide 1: See the Disclosure Appendix for the Analyst Certification and Other Disclosures. Careers in Finance J anuary 5, 2005 S c ott P e ng Citigroup Global Markets
Slide 2: The Basics • 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? Page 2 Citigroup Global Markets
Slide 3: What is Finance? • 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 Page 3 Citigroup Global Markets
Slide 4: What is Finance? • 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 Page 4 Citigroup Global Markets
Slide 5: Financial Institutions: The Old Days (Mid 90s) • Sell side – Investment Banks • Buy side – Commercial banks – Mutual funds & Money managers – Insurance companies Page 5 Citigroup Global Markets
Slide 6: Financial Institutions: Now • 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 Page 6 Citigroup Global Markets
Slide 7: Buy Side • 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 Page 7 Citigroup Global Markets
Slide 8: Buy Side • 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 Page 8 Citigroup Global Markets
Slide 9: Buy Side: Finance Companies • 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 Page 9 Citigroup Global Markets
Slide 10: Buy Side: Commercial Banks • 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 Page 10 – Structural Citigroup Global Markets
Slide 11: Buy Side: Mutual Funds and Money Managers • 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 Page 11 Citigroup Global Markets
Slide 12: Buy Side: Insurance Companies • 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 Page 12 Citigroup Global Markets
Slide 13: Buy Side: Hedge Funds • 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) Page 13 Citigroup Global Markets
Slide 14: Buy Side: Hedge Funds • 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 Page 14 Citigroup Global Markets
Slide 15: Sell Side: Investment & Commercial Banks • 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 Page 15 Citigroup Global Markets
Slide 16: Sell Side Functions • Investment banking – Investment banking – Mergers & Acquisitions • Sales & Trading – Trading – Sales – Strategy / Analyst – Research • Product types: Equity and Fixed Income Page 16 Citigroup Global Markets
Slide 17: Sell Side Functions: I-Banking • 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 Page 17 Citigroup Global Markets
Slide 18: Sell Side Functions: Sales & Trading • 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 Page 18 Citigroup Global Markets
Slide 19: Sell Side Functions: Strategy & Research • 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 Page 19 Citigroup Global Markets
Slide 20: Sell Side: Strategy & Research at Citigroup • 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 Page 20 Citigroup Global Markets
Slide 21: What Makes You A Good Wall Street Candidate? • 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 Page 21 Citigroup Global Markets
Slide 22: It Is Not Easy for PhD’s (Non-Econ) to Break In • 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 Page 22 Citigroup Global Markets
Slide 23: Disclaimer ANALYST CERTIFICATION I S o tt P ng, he re b y c e rtify that all o f the vie w s e xpre sse d in this re se a rc h re po rt ac c urate ly re fle c t m y pe rso nal vie w s abo ut any and all o f the sub je c t issue r(s) o r se c uritie s. Ialso c e rtify that no part o f m y ,c e c o m pe nsatio n w as, is, o r w ill b e dire c tly o r indire c tly re late d to the spe c ific re c o m m e ndatio n(s) o r vie w s in this re po rt. ADDITIONAL INFORMATION AVAILABLE UPON REQUEST C ank, N ., L ndo n B h and C itib .A o ranc itigro up G bal M ts I , inc luding its pare nt, sub sidiarie s and/o r affiliate s (“the Firm ”), m ay m ake a m arke t in the se c uritie s disc usse d in this re po rt and m ay se ll to o r b uy fro m lo arke nc c usto m e rs, as princ ipal, se c uritie s re c o m m e nde d in this re po rt. The Firm m ay have a po sitio n in se c uritie s o r o ptio ns o f any issue r re c o m m e nde d in this re po rt. A e m plo ye e o f the Firm m ay b e a dire c to r o f an issue r n re c o m m e nde d in this re po rt. The Firm m ay pe rfo rm o r solic it inve stm e nt b anking o r o the r se rvic e s fro m any issue r re c o m m e nde d in this re po rt. W the past thre e ye ars, the Firm m ay have ac te d as m anage r o r c o -m anage r o f a pub lic o ffe ring o f the se c uritie s o f any issue r re c o m m e nde d in this re po rt. S c uritie s re c o m m e nde d, o ffe re d, o r so ld b y the Firm : (i) ithin e are no t insure d b y the Fe de ral D po sit I e nsurance C rpo ratio n; (ii) are no t de po sits o r o the r o bligatio ns o f any insure d de po sito ry institutio n (inc luding C ank); and (iii) are sub je c t to inve stm e nt risks, inc luding the o itib po ssib le lo ss o f the princ ipal am o unt inve ste d. The Firm a re re gular issue rs o f, and trade in inc luding po sitio n ta king), trade d financ ial instrum e nts linke d to se c uritie s w hic h m ay have be e n re po rte d o n in the pre c e ding re se arc h re po rt I sting in no n-U . se c uritie s, including A R e ntails c e rtain risks. The se c uritie s o f no n-U issue rs m ay no t b e re giste re d w ith, no r b e subje c t to the re po rting re q uire m e nts o f, the U . S c uritie s and E hange nve .S D ’s .S. .S e xc C m m issio n. The re m ay be lim ite d info rm atio n availab le o n fo re ign se c uritie s. Fo re ign c o m panie s are ge ne rally no t sub je c t to unifo rm audit and re po rting standards, prac tic e s and re q uire m e nts c o m parab le to tho se in o the U . S c uritie s o f so m e fo re ig n c o m panie s m ay b e le ss liquid and the ir pric e s m o re vo latile than se c uritie s o f c o m parable U . c o m panie s. I additio n, e xc hange rate m o ve m e nts m ay have an adve rse e ffe c t o n the .S e .S n value o f an inve stm e nt in a fo re ign sto c k and its c o rre spo nding divide nd paym e nt fo r U . inve sto rs. N t divide nds to A Rinve sto rs are e stim ate d, using w ithho lding tax rate s c o nve ntio ns, de e m e d a cc urate , b ut .S e D inve sto rs are urge d to c o nsult the ir tax adviso r fo r e xac t divide nd c o m putatio ns. A ugh info rm atio n has be e n o b taine d fro m and is b ase d upo n so urce s the Firm b e lie ve s to be re liab le , w e do no t guarante e its ac curac y and it m ay b e inc o m ple te o r c o nde nse d. A o pinio ns and e stim ate s c o nstitute ltho ll the Firm 's judge m e nt as o f the date o f the re po rt and are subje c t to c hange w itho ut no tice . This re po rt is fo r info rm atio nal purpo se s o nly and is no t inte nde d as an o ffe r o r so lic itatio n fo r the purc hase o r sale o f a se c urity. This re se arc h re po rt do e s no t c o nstitute an o ffe r o f se c uritie s. A de c isio n to purc hase se c uritie s m e ntio ne d in this re se arc h m ust take into ac c o unt e xisting pub lic info rm atio n o n such se c urity o r any ny re giste re d pro spe c tus I sting in no n-U se c uritie s b y U pe rso ns m ay e ntail c e rtain risks. I sto rs w ho have re c e ive d this re po rt fro m the Firm m ay b e pro hib ite d in c e rtain U S s fro m purc hasing se c uritie s m e ntio ne d in this re po rt nve S S nve S tate fro m the Firm ; ple ase ask yo ur Financ ial C nsultant fo r additio nal de tails. o This re po rt is distrib ute d in the U d K m b y C ank, N . L ndo n B h o r C nite ingdo itib .A o ranc itigro up G bal M ts L ite d, C lo arke im itigro up C ntre , C e anada S uare , C q anary W harf, L ndo n E 4 5 L , U. This m a te rial is dire c te d o 1 BK e xc lusive ly at m arke t pro fe ssio nal and institutio nal inve sto r c usto m e rs and is no t fo r distrib utio n to private c usto m e rs, as de fine d b y the rule s o f the Financ ial S rvic e s A rity, w ho sho uld no t re ly o n this m ate rial. e utho Mre o ve r, any inve stm e nt o r se rvic e to w hic h the m ate rial m ay re late w ill no t b e m ade availab le to suc h private c usto m e rs. This m ate rial m ay re late to inve stm e nts o r se rvic e s o f a pe rso n o utside o f the U d K m o r o nite ingdo to o the r m atte rs w hic h are no t re gulate d b y the Financ ial S rvic e s A rity and furthe r de tails as to w he re this m ay b e the c ase are available upo n re q ue st in re spe c t o f this m ate rial. I this public atio n is b e ing m a de e utho f availab le in c e rtain pro vinc e s o f C anada b y C itigro up G bal M ts (C lo arke anada) I . ("The Firm C nc anada"), the Firm C anada has appro ve d this pub lic atio n. I this re po rt w as pre pare d b y the Firm (e xc luding N C f ikko itigro up L ite d) and distrib ute d in J im apan b y N C ikko itigro up L ite d, it is be ing so distrib ute d unde r lic e nse . This re po rt is m ade availab le in A im ustralia, to no n-re tail c lie nts thro ugh C itigro up G bal M ts A lo arke ustralia P L ite d ty im (A N6 4 0 0 3 1 1 4 8 3 2 ), and to re tail c lie nts thro ugh Sm ith B y C B arne itigro up A ustralia Pty L (A N1 0 0 0 9 1 45 5 5 5 ), L e nse d Se c uritie s D ale rs. I N w Z aland it is m ade availab le thro ugh C td B ic e ne e itigro up G b al M ts N w lo arke e Z aland L ite d, a m e m b e r firm o f the N w Z aland S c k E hange . This re po rt do e s no t take into ac c o unt the inve stm e nt o b je c tive s, financ ial situatio n o r partic ular ne e ds o f any partic ular pe rso n. I sto rs sho uld e im ee to xc nve o b tain advic e ba se d o n the ir o w n individual c irc um stanc e s b e fo re m aking a n inve stm e nt de c isio n. C itigro up G bal M ts (P L ite d is inc o rpo rate d in the R public o f S uth A a (c o m pany re gistratio n num b e r lo arke ty) im e o fric 2 0 0 0 /0 2 5 8 6 6 /0 7) and its re giste re d o ffic e is at C ank P itib laza, 1 45 W st S e t, S e tre ando w n, Sandto n, 2 1 9 6 , R pub lic o f S uth A a. The inve stm e nts and se rvic e s c o ntaine d he re in are no t availab le to private c usto m e rs in e o fric So uth A a. This pub lic atio n is m ade availab le in S fric ingapo re thro ugh C itigro up G b al M ts Singapo re H ldings P L a lic e nse d D ale r and I stm e nt A lo arke o te td, e nve dviso r. This re po rt is be ing distrib ute d in H ng Kng b y o r o n o o b e half o f, and is attrib utable to C itigro up G bal M ts A L ite d, 2 0 th Flo o r, Thre e E hange S uare , H ng Kng . lo arke sia im xc q o o C itigro up G bal M ts I . is a m e m be r o f the S c uritie s I sto r P te c tio n C rpo ratio n (SPC © C lo arke nc e nve ro o I ). itigro up G b al M ts I ., 2 0 0 3 . A rights re se rve d S ith B y is a divisio n and se rvic e m ark o f C lo arke nc ll m arne itigro up G bal M ts I . and its affiliate s and is use d and re giste re d thro ug ho ut the w o rld. C lo arke nc itigro up a nd the U b re lla D vic e are trade m arks and se rvic e m arks o f C o rp and its affiliate s and are use d and re giste re d m e itic thro ugho ut the w o rld. C ® is a se rvic e m ark o f C o rp. A unautho rize d use , duplic atio n o r disc lo sure is pro hib ite d b y law and m ay re sult in pro se c utio n. N is a se rvic e m ark o f N C rdial C rpo ratio n. . . itiFx itic ny ikko ikko o o Page 23 Citigroup Global Markets