Tuesday, February 2, 2010

Investment Perspectives — Taiwan [MORGAN STANLEY]

Over the course of 2009, the APxJ analyst team published
612 Research Tactical Ideas (RTI) targeting short-term
tactical opportunities. The RTIs allow analysts to express their views on the likely direction of near-term stock price movements, complementing their long-term fundamental view
on the stock. Analysts can express this view in absolute or relative terms over a stated time-period that ranges from 15 to 60 days. In a straightforward publishing template, they also
provide a brief rationale and indicate their level of conviction on the idea on a three-point scale.

We find that in aggregate the 612 RTIs generated positive results for 2009. Using a potentially conservative metric of gross capital allocated to active RTIs, we compute that over the course of 2009, the cumulative Return on Average Capital was 14.7% and the cumulative Return on Maximum (Peak) Capital was 8.0%. The results suggest that the RTIs complement our core, risk-reward-based fundamental research product in a way that can deliver value-added for
our clients.

We track RTI activity and performance carefully to ensure our product can deliver value-added (α!) for our clients. Measuring RTI activity for our coverage universe is easy: we simply track how many active ideas are outstanding on a daily basis. Exhibit 1 shows that, after a slow start in 2009, our analysts kept up a steady flow of RTI publications throughout 2009, with a surge late in the year before the holiday season.This regular maintained level of activity is necessary for the XTI product to be relevant for α-capture clients.

Profit/loss (P&L): Our metric of choice to summarize RTI performance. We base the P&L of a single RTI on two components:

Return measure: We measure absolute total returns or returns relative to a benchmark return over the relevant time horizon, depending on the case. Our return calculation also takes into account trading costs and other trading constraints. (For further details, see full report.)

2) Nominal investment in the RTI: We assign a nominal US$- denominated investment to each RTI based on the conviction of the idea: we assign US$5mn, US$4mn, and US$3mn to ideas of 80%+, 70%-80%, and 60%-70% probabilityconviction, respectively. In our calculations, we limit the nominal notional investment for each idea to a maximum of 20% of trading volume (in US$) on the day of execution of the RTI if the former exceeds the latter. If an idea cannot be executed (e.g., short-sale restrictions) when published, we set the notional investment of rejected ideas to zero. Relative ideas lead to offsetting long and short nominal exposure, while absolute RTIs generate exposure in only one direction. We aggregate idea-level P&Ls and nominal investments
to get the results for the region over the course of 2009.

Exhibit 2 shows that while we started the year in the black, the team incurred losses in March and April that left cumulative P&L to be negative by the end of March. However, the monthly P&Ls rebounded strongly from May onwards resulting in a cumulative P&L of $23.3m for the year. Overall, monthly P&L was positive in 10 out of 12 months.


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