Morgan Stanley Wealth Management Delivers New Tool to Help Clients Tackle Single Stock Risk
As a risk management tool, this can help provide important insights for investors—especially those who hold concentrated equity positions, which Morgan Stanley defines as five or fewer stocks making up more than 30% of the risk in a portfolio. Concentrated equity positions often occur naturally for company founders, those who receive equity compensation, and early investors. As these positions grow over time, they can unwittingly expose the investor to underperformance, higher volatility and material drawdowns—when a stock begins to decline from its peak and can drag the rest of the investor's portfolio down with it.
Looking historically, the GIO found that among the individual stocks contained in the Russell 1000 Index, a stock market index that represents the 1000 top companies by market capitalization in the United States:
Individual stocks were more than twice as volatile as the index itself (37% v. 15%) since 2014
The average stock's maximum drawdown was twice as large as the index's (approximately 50% vs. 25%)
Most individual stocks tend to underperform the index on any forward-looking basis, with the median underperformance clocking in at -2.6% per year
Most stocks that outperformed the index over five years went on to then underperform in the following five years1
The Equity Vulnerability Score can help flag the likelihood that a stock may soon drop in value, and can also be used to complement Morgan Stanley's existing Tactical Equity Framework, which helps identify short-term opportunities to seek overall stronger performance.
'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,' said Steve Edwards, Senior Investment Strategist, Morgan Stanley Wealth Management. 'And while it is natural to have an emotional attachment to a stock that you've watched grow over time, it can also pose an outsized risk. Morgan Stanley Wealth Management has been unwavering in helping to address this issue, and the vulnerability score puts another arrow in our quiver to continue to do just that.'
The Equity Vulnerability Score draws from a broad range of indicators proven to have a strong correlation with the negative returns brought on by drawdowns, in three main categories:
Financial Stability – Looks at the stability of a company's finances by comparing key metrics such as earnings or revenue, as well as how much those numbers fluctuate over time.
Fundamental Momentum – Checks whether a company's important financial numbers are improving or declining, using key gauges of profitability, quality, and value.
Volatility and Tail Risk – Measures recent stock price moves, focusing on large drops and trading activity.
For more information, please find the following report: Global Investment Committee Special Report: Confronting the Concentrated Equity Challenge and Measuring Drawdown Vulnerability.
See also: https://wmrsi.webfarm.ms.com/pub/content/wmrsi/reports/marketing/gic/s24_gic/CD60D6B1-D6EF-40D6-9A64-2E071578D94B.disclosure.html
About Morgan Stanley Wealth Management
Morgan Stanley Wealth Management is a leading financial services firm that provides access to a wide range of products and services to individuals, businesses, and institutions, including brokerage and investment advisory services, financial and wealth planning, cash management and lending products and services, annuities and insurance, retirement, and trust services.
About Morgan Stanley
Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, wealth management and investment management services. With offices in 42 countries, the Firm's employees serve clients worldwide including corporations, governments, institutions and individuals. For further information about Morgan Stanley, please visit https://www.morganstanley.com/.
A decline in the value of the investments held in a concentrated portfolio of a limited number of securities would cause the portfolio's overall value to decline to a greater degree than that of a less concentrated portfolio.
Morgan Stanley's Equity Vulnerability Score is a quantitative factor-based ranking of US stocks' relative vulnerability to future drawdowns. To compute the Equity Vulnerability Score, a set of three differentiated factor categories were selected: (1) the Financial Stability category, (2) the Fundamental Momentum category, and (3) the Volatility and Tail Risk category. After combining the scores for the underlying indicators therein to derive the three categories-level scores, the categories' conclusions are then blended into the overall Equity Vulnerability Score. Consistent with Morgan Stanley's Tactical Equity Framework, the Equity Vulnerability Score relied primarily on FactSet's Quant Factor Library (QFL) dataset.
© 2025 Morgan Stanley Smith Barney LLC. Member SIPC
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1 As of December 31, 2024. Source: Morgan Stanley Global Investment Committee Special Report: Confronting the Concentrated Equity Challenge and Measuring Drawdown Vulnerability
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