Quality Investing

Quality investing is an investment strategy that focuses on financially sound companies that have a history of solid earnings.

Investing in quality companies is an approach that can be traced back to world-renowned Economist and mentor to Warren Buffet, Benjamin Graham. In his book The Intelligent Investor first published in 1949, Graham said 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.”

Such companies, Graham stated, show resilience by falling less in a downturn and recovering to previous highs quicker than other companies. Numerous academic research supports this. Analysis also shows that while a quality investing approach does tend to behave defensively in downturns, this approach also tends to perform strongly in bull markets. This is why quality investing is known as a strategy for ‘all seasons’.

The quality factor is described in academic literature as companies with durable business models and sustainable competitive advantages. Nobel Laureates Eugene Fama and Kenneth French, in their seminal paper titled A Five-Factor Asset Pricing Model highlight the “Quality Premium”. Economist Robert Novy-Marx is another well-known proponent of quality investing. In his paper Quality Investing, Robert Novy-Marx set out to identify quality by assessing the best-known quality strategies. MSCI based its Quality Indices, launched in December 2012, on the principles of the best performing quality strategy in his paper.