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The Quality Factor

The Quality Factor

19-07-2017 | From the field
The quality effect is the tendency of high-quality stocks to outperform low-quality ones.
  • Laurens Swinkels
    Laurens
    Swinkels
    Quant Equity Researcher

In this Norges Bank Investment Management (NBIM) paper , the authors conducted an empirical study of six stock characteristics that are associated with quality: (1) gross profitability, (2) cash flows, (3) leverage, (4) change in net debt, (5) EPS stability, and (6) EPS quality. They used a global sample over the period 1994-2015 and found overwhelming evidence of excess returns for these quality factors. An equally-weighted combination generates an excess return of 8.94 percent with an information ratio of 0.95.

It is difficult to find risk-based explanations for why high-quality stocks should outperform low-quality stocks, as the low-quality stocks typically seem riskiest. Behavioral and institutional explanations that have been put forward in the literature for the quality effect therefore appear to be more plausible.

At Robeco, we subscribe to the idea that quality variables lead to excess returns. They have formed part of our quantitative stock selection models since the launch of our first quant equity strategy back in 2002, and a dedicated equity quality factor strategy was launched in 2016. Moreover, we also apply quality variables in our quantitative corporate bond selection models that are used in our factor credit strategies.

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From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

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