New Merrill Rule: 20% of Stocks Rated 'Underweight'
Merrill Lynch said its analysts will soon have to rate at least 20 percent of the stocks in their sector as "underweight," to better match historical returns for stocks.
Merrill rates about 10 percent of stocks it covers now as ''sell,'' but over the last decade, about 40 percent of stocks in major global and U.S. indexes have declined.
"We want to bring those two numbers closer together to drive better investment performance for our clients,'' said Candace Browning, president of Merrill Lynch Global Research.
It does not make sense to force 40 percent of ratings to be ''underperform,'' because Merrill Lynch does not cover every stock in the major indexes, and tends to focus on stocks it thinks will perform better, Browning said.
The change comes as part of a broad retooling of Merrill's ratings system effective June 2.
New ratings will account for both a stock's expected returns, including dividends, and its expected performance relative to its sector.
Under the new system, stocks with a "buy" rating must be expected to return at least 10 percent to investors within 12 months of the initial rating, and must be among the most attractive stocks in a sector.
Stocks rated "neutral" must be expected to generate flat or positive returns, and be less attractive than "buy" rated stocks.
Stocks rated "underperform" must be expected to either turn in a negative performance, or be the least attractive in their sector.
No more than 70 percent of stocks in a coverage sector may be rated "buy" under the new system, and no more than 30 percent may be rated "neutral." Merrill Lynch currently calls its weakest rating category "sell," and as of April 1 rated 9.9 percent of the stocks it covers in that category globally.
The changes were not driven by investors' requests or complaints, but instead by Merrill Lynch's belief that clients want to know how the stocks in a sector will perform relative to one another, Browning said.
In 2003, Merrill Lynch was one of 10 banks that settled with U.S. regulators over charges of biased research.
Merrill did not admit or deny charges, but did pay $200 million.
Regulators said Merrill analysts privately expressed negative views on two companies, but failed to reflect those views in their reports.