Risk Return Framework of Morgan Stanley Research

1. What brought about the need for a new research ratings framework? What was wrong with the old or previous framework?

The risk-reward approach was introduced as a tool to help analysts who were not meeting expectations such as not knowing what they were doing with the stocks or worried about being unjustifiably different from the consensus.

The previous framework uses fundamental analysis of a company's intrinsic and its projected cash flows which produces a single target price. This approach is purely dependent on the analyst's assumptions and firm conviction where assumptions are being restrictive for the sake of convenience and that forecasts are based on extrapolations of the past. Further, it also does not take into account the uncertainties attached to the stock and the tradeoffs.

2. Describe the motivations behind the investment research in the institutional setting?

Equity research aimed to interest clients in a particular investment and trading opportunities to generate trading commissions which are paid by the investors based on the quality of ideas and trading calls and on the execution efficiency. Institutional investors calculate their allocation of trading commission payments among brokerages based on survey results of their own analysts, traders and portfolio managers. This is also why brokerage houses and research departments have strong incentive scheme based on its service quality by providing institutional investors with valuable and differentiated insights. Moreover, some analysts resort to bold recommendations to stand out from the pack as there are only a few analysts holding the bulk of the buy-side's attention which translates to a bigger chunk of commissions.

3. Describe how research plays its role in the investment process of institutions? What support do the research analysts receive? What's a typical day?

Basically, research is done with the objective to interest clients in a particular investment and trading opportunities. With this, analysts are challenged by the stock selection committee on their assumptions, the editorial team checks on the compliance of the report to the standards and the global valuation and accounting professionals to strengthen the model.

Every morning, the bank's sales and distribution team convenes to hear the best analyst ideas before a day of sales calls and conversations with buy-side institutional clients.

4. Critique the new framework of Morgan Stanley. What are the strengths and weaknesses? What are the opportunities and pitfalls? Approach it from various shareholder perspectives.

The framework standardized an approach that brought discussions to a different level but at the same time allowing the salesforce to change the direction of the call and choose which scenario to focus