Merrill Lynch Global Research today announced a new system of equity ratings, which is designed to enhance transparency into analysts’ views, ensure greater differentiation among the ratings within a sector, and closer alignment between rating distributions and historical stock performance.

Under the new equity ratings structure, which is due to launch June 2, stocks with “buy” ratings are expected to have a total return of at least 10% over the coming 12 months, and are the most attractive stocks in a coverage cluster. “Neutral” stocks are expected to remain flat or increase, but be less attractive than buy-rated stocks. “Underperform” stocks are expected to have either a negative total return; or, have a positive total return but be the least attractive stocks in a coverage cluster.

The firm defines a “coverage cluster” as a group of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification.

The new system also introduces dispersion guidelines that limit the number of the stocks in each investment rating category: buy-rated stocks may not exceed 70% of each cluster, neutral-rated stocks may not exceed 30%, and underperforms must be at least 20% of each coverage cluster.

Candace Browning, president of Merrill Lynch Global Research, said, “The basis of the new equity rating system is to reinforce our ongoing drive to encourage Merrill Lynch analysts to adopt the perspective and mindset of top-performing investors.”

“The rationale behind the introduction of rating dispersion requirements is compelling. By introducing distribution guidelines, we can be certain that our analysts’ distributions correlate more closely with historical return statistics,” added Browning. “I am confident that the new Merrill Lynch equity rating system will enhance our ability to provide incremental alpha-generating investment returns to our clients.”

Merrill Lynch is also requiring an investment thesis, providing the rationale behind the analyst’s recommendation, and a price objective target for every stock under coverage to maximize the transparency and support the analytical and intellectual basis of analysts’ convictions and recommendations. In addition, Merrill Lynch analysts will continue to provide clients with volatility risk ratings and dividend ratings.