Executive Summary
The foundations of 'quality' investing were borne from the development of stock markets, as investors sought companies with strong financial positions and expectations that earnings would be dependable over time.
In this paper, we set out the foundations of quality investing. We then compare its performance and its risk (as measured by standard deviation of returns) to other identifiable investing ‘factors’ using over 25 years of history. Quality, like other factors, behaves differently during different economic regimes.
Our results show, as a factor, quality has the best risk-adjusted returns above the benchmark. Additionally, it exhibits defensive characteristics, outperforming during economic slowdowns, experiencing smaller declines during market downturns, and recovering more swiftly to previous highs.
These results have important implications for asset allocators. Predicting the changes in economic trends can be difficult, so having a meaningful allocation to the quality factor as a core part of the portfolio could serve investors over the long term. Around this position, other factors and sector positions could be taken depending on the expectations and risk tolerance of the investor.
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