Quality Factor - US

Overview

Investors have been seeking out high-quality companies for decades. The high-quality companies provide persistent profitability, low leverage and high return. Empirical evidences laud the merits of a Quality investment approach. What is agreed: higher profitability, more stable income and cash flows, and a lack of excessive leverage are the marks of quality companies.

Quality has demonstrated the ability to reward long-term investors. Similarly Quality tends to lag during low-quality rallies - or when the lowest-quality stocks lead the market in a rebound.

Data Highlights

  1. For low-risk and high return investors, the portfolios with the absolute highest of overall quality (in terms of profitability, growth, and safety) outperform the market both in regards to generating risk-adjusted and cumulative return.
  2. Based on our research, stocks of the absolute highest quality in terms of profitability, growth, and safety are likely to outperform the market.
  3. For timeliness, when looking at quality over time different sub-factors drove out-performance at different periods. When investors are bullish, there is a focus on growth. However during times of uncertainty, investors are more likely to focus on safety and reliable profits.

Performance Showcase

The demonstration of quality performance shows the comparison of different quality portfolios. Portfolios were rebalanced monthly using a market-cap weighted method, with 20 bps deducted as costs per transaction.

 
Annual Return
Cumulative Return
Volatility
Sharpe ratio
Calmar ratio
Max Drawdown
Omega ratio
Sortino ratio
Skew
Kurtosis
Tail ratio
Monthly value at risk
Alpha
Beta
SPY
5.20%
132.86
13.84%
0.44
0.10
-50.83%
1.42
0.63
-0.46
2.63
0.99
-0.06
0.00%
1.00
Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10
7.90% 9.41% 8.66% 8.92% 8.78% 9.17% 10.28% 10.83% 10.68% 9.69%
254.85 347.53 299.07 315.36 306.76 331.85 411.21 455.03 442.79 367.07
20.92% 19.42% 19.50% 18.18% 16.11% 15.89% 15.11% 13.98% 14.64% 15.34%
0.47 0.56 0.52 0.56 0.60 0.63 0.73 0.81 0.77 0.68
0.12 0.15 0.13 0.15 0.17 0.18 0.20 0.31 0.31 0.21
-66.51% -63.94% -66.09% -59.64% -51.94% -52.16% -50.48% -34.49% -34.13% -46.20%
1.49 1.62 1.60 1.63 1.64 1.68 1.78 1.85 1.81 1.70
0.73 0.89 0.82 0.87 0.94 0.98 1.15 1.30 1.23 1.07
0.03 0.16 0.20 0.02 -0.16 -0.37 -0.20 -0.17 -0.16 -0.21
4.44 4.83 7.00 5.08 3.59 4.97 2.53 1.71 2.22 2.13
1.35 1.08 0.95 1.14 1.01 1.09 1.15 1.07 1.02 0.98
-0.09 -0.08 -0.08 -0.08 -0.07 -0.07 -0.06 -0.06 -0.06 -0.06
1.66% 3.16% 2.43% 2.88% 2.96% 3.50% 4.78% 5.54% 5.23% 4.16%
1.35 1.28 1.29 1.21 1.12 1.09 1.02 0.95 1.00 1.04