Forms part of an investment strategy that selects high-quality companies.
The criteria for this factor can be 'hard' (e.g., returns on shareholders' equity and free cashflows), but the application of this factor can also be based on 'softer' criteria such as quality of management, corporate governance and market position. As there is no precise fixed definition for Quality, academic circles are debating the use of this factor.
Valuation can also play a role in the selection of Quality stocks. Therefore, ongoing debate is questioning whether this factor differs from the Value factor. Researchers Assness and Frazzini1 define the Quality factor as investing in the stocks of safe, profitable, expanding and well-managed companies.
Interest in the Quality factor increased in the aftermath of auditing scandals such as the Enron affair in 2001. Another reason for the increased interest in the Quality factor is the possibility of achieving greater diversification.
1Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen: 'Quality Minus Junk', 2013