OK… There Is Out-performance But Where Does It Come From?

Compared to the S&P 500, S&P 500 Quality has a tilt towards value stocks, lower debt, lower earnings volatility and higher earnings growth – which are attributes usually associated with ‘good quality’ companies.

Source: Figures based on monthly USD total returns between December 1994 and December 2013 on the S&P 500 Quality Index.  Charts and graphs are provided for illustrative purposes.  Past performance is no guarantee of future results.  These charts and graphs may reflect hypothetical historical performance.

More Powerful Together Than Apart?

On the face of it, low volatility and high quality strategies seem very similar but there are important differences between their sources of return. Similarly, because quality strategies also have some tilt towards value stocks, there may be the belief that they are analogous concepts. Results have shown that while quality strategies already perform well by themselves, they appear to be good companions of other alternative beta strategies.

Combination of Quality and Value Strategies
MetricValueStrategy 1: 50% Value /50% Quality Equal WeightStrategy 2: Quality on a Value Universe
Annualized Return (%)5.586.9411.98
Annualized Risk (%)16.6314.9315.13
Return per Unit Risk0.310.460.79

Source: Figures based on monthly USD total returns between December 1994 and December 2013 on the S&P 500 Quality Index and S&P 500 Value Index.  Charts and graphs are provided for illustrative purposes.  Past performance is no guarantee of future results.  These charts and graphs may reflect hypothetical historical performance.

 

This article was written by Daniel Ung, associate director, index research & design, S&P Dow Jones Indices.

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