Morgan Stanley IM: Capital Allocation

In this updated report, we extend the analysis back to 1970 and through 2024, including capital allocation and return on invested capital (ROIC) data. We review the alternatives closely and offer a guide for thinking about value creation. We end with a framework for assessing capital allocation skills, which includes past behavior, ROIC, incentives, and key principles.

Results, Analysis, and Assessment

• Capital allocation is an essential part of creating value and is one of management's prime responsibilities. Not all senior executives know how to allocate capital effectively.
• This report is an update of one from December 2022. We extend most of the analysis back to 1970, update the data through 2024, and discuss results for the first half of 2025 where practicable.
• These data include capital allocation, return on invested capital, and other relevant financial results.
• We review capital allocation alternatives in detail, including a novel discussion of intangible investments, and offer a guide for thinking about the prospects for value creation.
• We finish with a framework for assessing a company's capital allocation skills, which includes looking at past behavior, calculating return on invested capital, an evaluation of incentives, and five principles of effective capital allocation.

DEFINITIONS

Return On Invested Capital (ROIC) represents the rate of return a company makes on the cash it invests in its business.

The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

IMPORTANT INFORMATION

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.

This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

Prior to making any investment decision, investors should carefully review the strategy’s relevant offering document. For the complete content and important disclosures, refer to the article pdf.