Morgan Stanley Wealth Management has introduced the Equity Vulnerability Score, a new tool designed to help clients and financial advisors assess the potential risk of U.S. stocks dropping in value. This tool is particularly beneficial for investors with concentrated equity positions, defined by Morgan Stanley as portfolios where five or fewer stocks contribute to over 30% of the portfolio's risk.
Steve Edwards, Senior Investment Strategist at Morgan Stanley Wealth Management, highlighted the importance of addressing this often-overlooked challenge faced by many clients. He stated, "As a leader in both equity compensation and in providing guidance to founders, early-stage investors, and executives of publicly traded companies, we see this is a significant and often overlooked challenge for many of the clients our Advisors serve."
The Equity Vulnerability Score evaluates stocks using three main categories: Financial Stability, Fundamental Momentum, and Volatility and Tail Risk. These categories are derived from indicators that have shown strong correlations with negative returns during stock drawdowns.
Historically, individual stocks within the Russell 1000 Index have demonstrated higher volatility compared to the index itself. Since 2014, individual stocks were found to be more than twice as volatile as the index (37% vs. 15%), with average maximum drawdowns twice as large (approximately 50% vs. 25%).
Morgan Stanley aims for this tool to complement its existing Tactical Equity Framework by identifying short-term opportunities for stronger performance.
For more information on this development and related insights into managing concentrated equity challenges, readers can refer to Morgan Stanley’s Global Investment Committee Special Report.