Colin Barry

Morgan Stanley Risk-Reward Framework / Valuation in Practice (BAV, Tuesday, Week 11)


Morgan Stanley moves to a more-nuanced standard for analyst reports. Good idea?

-- Sketching out bull/bear/base cases => forces a more fundamentals-based approach
-- Explicitly surfaces critical uncertainties
-- Greater transparency, CYA
-- Forces analysts to question assumptions and consider the downside
-- Provokes conversation, accommodates customer heterogeneity
*** Enables analysts to lay out a bear case without alienating company and destroying future access to management

-- Is this really innovative? Everyone does this...
-- No clear decision/recommendation, lack of commitment
-- Too much transparency? Some of these reports are bad...
-- False sense of certainty
-- Pressure on top analysts to change; may drive them away

What makes a good sell-side research analyst? What do analysts do?
-- Industry knowledge
-- Access to company management
-- Stock-picking ability
Premium for all-star analysts => Institutional Investor grading

Still room for improvement:
-- Can simplify probability inferences and/or report options market's inferred probability of each scenario
-- Could give some flexibility to "top" analysts => one-size-fits-all isn't always correct

General thoughts
Risk-reward framework enables better justification of negative reports, may be more informative, and lowers the probability of "herding" in analyst assessments.
But there are limits to one-size-fits-all, and it's harder to do quality control on complex reports.
Maybe this is not that innovative, maybe it should be easy to copy. But research reports had not changed in decades...