Resources
Quality Investing
An approach for investing through the cycle, resilient to economic headwinds and market drawdowns.
Buying Quality companies seems an intuitively straightforward path to investment success. History supports the argument. The difficulty for investors is identifying those companies that are truly "Quality".
Concept of Quality
The Quality factor is described in academic literature as companies with durable business models and sustainable competitive advantages.
Warren Buffet’s mentor Benjamin Graham, Jeremy Grantham from Grantham, Mayo, & van Otterloo (GMO) and the economist Robert Novy-Marx are well known proponents of Quality investing. They all exhibited a rigorous focus on Quality attributes of stocks.
In what is considered one of the world’s best investing almanacs “The Intelligent Investor”, Benjamin Graham outlines some of the fundamental measures he looks for in a company. There are seven in total but ones that investors should not ignore include a sufficiently strong financial condition, earnings stability and earnings growth.
A recurring theme of The Intelligent Investor is that investors should demand from a company "a sufficiently strong financial position and the potential that its earnings will at least be maintained over the years.”
Adequate size of the enterprise
Earnings growth
Sufficiently strong financial condition
Moderate ratio of Price to Assets
Earning stability
Moderate Price to Earnings ratio
Dividend record
| Authors | Quality aspect | Summary |
|---|---|---|
| Benjamin Graham (1937) |
Profitability Stability Earnings Quality |
|
| Richard Sloan (1996) |
Earnings Quality |
|
| GMO white paper (2004) |
Profitability Stable Earnings Low Debt |
|
| Robert Novy-Marx (2012) |
Profitability |
|
| Max Kozlov and Antii Petajisto (2013) |
Earnings Quality |
|
| Clifford S. Asness, Andrea Frazzini, and Lasse H Perdersen (2013) |
Growth Payout Profitability Safety |
|
| Eugene F. Fama, Kenneth R. French (2014) |
Quality and Profitability |
|
MSCI Quality Indices
MSCI, one of the world’s largest index providers, analyses all of the companies in its universe and creates its Quality Indices based on the basis of three key Quality factors:
Identifiable metric:
1. High return on equity
Shows how effectively a company uses investments to generate earnings growth
Identifiable metric:
2. Low leverage/low debt
A measure of company leverage; and
Identifiable metric:
3. Earnings stability
How smooth recent earnings growth has been
Other approaches to Quality
We found that in Australian small companies, by focusing on dividend payers, the resulting portfolio has a Quality tilt.
view the pdfExplore our Quality ETFs
We offer three international equity ETFs that utilise MSCI’s Quality approach
We also offer an Australian Small Companies ETF that focuses on dividend payers which has been shown to result in a Quality tilt.
Key risks: Investments in ETFs carry risks associated with financial markets generally, individual company management, industry sectors, fund operations and tracking an index. See the PDS and TMD for more details on risks and whether these products are appropriate for you. Investment returns and capital are not guaranteed.