Quality Investing: How to outperform growth and value long-term

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Quality stocks have consistently outperformed growth and value stocks over the long term and capture less of the downside in down markets. The challenge for investors is knowing how to identify and measure quality. To this end, our investment team has carried out extensive research and built an investment strategy using a proprietary definition and index that has consistently outperformed the MSCI World Quality Index over a 20-year period.

Many investors favour the concepts of growth and value in their investment strategies. The concepts are well defined, researched and familiar. The concept of quality is increasingly used as a basis for investment, and rightly so, but there are many views as to how quality can be defined.

Our analysis of quality suggests that certain companies – irrespective of their value or growth orientation – exhibit numerous common factors, such as high returns and margins, appropriate leverage, and consistent dividends and payout ratios.

These types of metrics are traditionally used to define quality as they capture different aspects of it. However, our research shows that a more accurate picture of a company’s quality can be found by using a broader range of elements to create a bespoke definition of quality.

In addition to accounting metrics, other measures we can use to assess a firm’s quality include environmental, social and governance (ESG) measures such as staff turnover, board diversity/independence and overall ESG performance. Having said that, these metrics may be harder to find and measure reliably for a broad universe of stocks. This is why we have created a specific platform for their incorporation within our investment process.

In addition, we have observed that quality correlates with growth and value at different times in the economic cycle. As a result, we complement our understanding of quality by using additional models of growth and value.

Click below to download our Quality Investing strategy paper, where we share our research findings, our resultant definition and index of quality and our recommended approach to selecting quality investments:

Download Quality Investing guide