View from the inside

An analyst's account of what happens when the markets move against you
Asset management

I'm late to the meeting, and when I get there the fund managers are discussing just how much they've lost. Figures of £3 million and £4 million are thrown around, with one particularly angry individual claiming £8 million.

Of course, they haven't lost the money personally: the market has removed the value from the portfolios they manage on behalf of their clients, but fund managers talk in a very proprietorial manner about their funds.

The performance of a fund and a manager's professional reputation are very closely correlated; good performance can bring substantial reward, but a period of poor performance can see the industry door swing shut on an individual - permanently.

"My firm has lost £30 million and I'm very worried that it's my fault"

Now the fund managers are totalling up the losses more carefully, adding in those suffered by managers in our US offices, and coming to a final figure for the firm. My heart is beating so heavily that I'm worried the fund managers can hear it.

I was a student six months ago, but nothing at school or university explicitly prepared me for a situation in which my firm has lost £30 million and I'm very worried that it's my fault.

Troubled waters

I'm an analyst, the typical graduate entry position in an asset management firm and, for me, it's investment ideas that determine my professional reputation.

You're given a list of companies, usually in the same sector (I am an oil analyst); you research them, you value them, and you present buy/sell/hold recommendations to the fund managers, who then decide whether to back your judgement with real money.

And what has happened here is that real money has followed one of my "buy" recommendations, with seemingly disastrous results.

The investment in question is a small European oil producer that's making large, and potentially company-transforming, investments in oil and gas fields in the Gulf of Mexico.

With the help of very experienced oil sector analysts from various research companies, I have mapped out the potential cashflows from these investments, going out fifteen years or so into the future. I have divided the total by the number of shares in existence and, when compared with these promised future riches, the current stock price looks very puny indeed.

A lot of this work was done by the previous holder of my job, who is still with the company but has rotated into another sector. I am strongly encouraged to do my own thinking, so have looked at it from every angle I can conceive of and have decided he was right.

I am further encouraged to take "ownership" of the idea and to show "conviction", so I have slogged around our fund managers' offices on both sides of the Atlantic promoting the shares.

The net result of my efforts, and those of my predecessor, is that our firm now owns about 10 per cent of the entire company - which is worth around £75 million.

Or it was yesterday. Today the company announced some major delays in the realisation of its American ambitions. And the shares fell 40 per cent.

Fund managers have been leaving me voice messages, some angry and some more sanguine. The analysts outside the company who helped me with my work are all trying to get in touch as well - they're worried that the fall reflects badly on them, but they also have a commercial interest in trying to find out what our firm might do with our rapidly depreciating shares.

A journalist from a national newspaper calls. I have been trained to say nothing, and redirect him to our PR people. He ignores this and rings two or three more times and eventually I have to stop answering the phone.

So what does an analyst do when something like this happens? I have continually been given the same piece of advice for dealing with a stock idea gone wrong: don't hide.

I try to contact all of the firm's fund managers who are holding the stock. I apologise. Reactions vary. There is anger - some directed at me, but fund managers are also cross with the oil company executives, with the previous analyst and with themselves.

Some want to sell the shares now to put the disappointment behind them and move on. Others are calm, and ask to be given new information as and when it arrives. Still others, who had not previously bought the shares, are intrigued. They find any large share price fall a potentially attractive entry point.

On the up

Late in the afternoon, the meeting to discuss this particular investment takes place. I am there, and am invited to contribute but, in the main, the fund managers themselves, all at least a decade older than me, and in much smarter suits, do the talking.

It's decided that there isn't a quantitative solution here. We could try remodelling the cashflows but with news from the Gulf of Mexico so vague, we would have little confidence in our inputs.

So we resolve to meet with the oil company's senior executives. For a firm of our size, and in these circumstances, it's an invitation they will find hard to refuse.

While they describe the situation and their recovery plan, we will look closely at their faces. Is there conviction in what they're saying? We will repeatedly question them on their assumptions, and try to root out inconsistencies. Finally, we will look hard again at their biographies. What have these people achieved in the past that might make them worthy of our continued trust now?

As the meeting continues, my anxiety subsides and I start to feel stimulated again, intrigued. Here, in the midst of my most mortifying professional experience so far, is a reminder of what is coming to fascinate me more and more about the investment industry.

There's a lot of discussion of the importance of numeracy when hiring graduates and plenty of spreadsheet work in the early years but, for me, fund management will always be about analysing human behaviour.

In the case of the oil company, are these executives the right people in whom to place our faith? And which of those varying reactions from the fund managers, all clever people, but operating at times like these under considerable psychological pressure, will prove to be the correct course of action? And if a particular strategy works this time, will it always be the best response to a setback?

I have my suspicions, but it will take a few years yet of watching share prices go up and down, and plenty of hard work, before I might become a fund manager and able to put my theories in practice, to test them against the collective wisdom and folly of the stock market.

And, I promise myself, I won't ever get too angry at inexperienced but well-meaning analysts

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