Manoeuvring global economic and business uncertainties via quality investing Quality companies, characterized by strong financials and brand image, have historically outperformed during market downturns and sideways trends. Investing in quality-focused mutual funds offers a way to tap into this potential, emphasizing thorough research and valuation discipline
In the years following the Covid-19 pandemic, the equity markets worldwide were on a tear. Fuelled by low interest rates and government stimulus, most large economies also grew quickly. Many styles, such as momentum, value, alpha, etc., fared extremely well for nearly four years. Quality strategy, however, remained relatively lackadaisical over this period.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} The macro and business environments have changed in the past few quarters.
The US trade tariffs (and the uncertainty around their implementation), geopolitical skirmishes (including now in the Indian subcontinent as well), elevated global debt (rising interest burden), and slowing domestic corporate profitability are factors to contend with. There could be a period of economic and market uncertainty staring at investors. It is precisely in these uncertain and volatile times that quality would work.
More so, now with the relative underperformance over the past five years helping make valuations come to more comfortable levels.
Systematic push to quality
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Now, quality carries multiple traits with it in the context of companies. Brand image, economic moat, superior margin/financial profile, sustainable profitability and cash flows, product and/or service excellence, and a strong customer base are some such factors associated with quality companies.To tap the best investible set of stocks from these traits, a process needs to be followed.
As a first step, companies with the above-mentioned traits and also any other potential candidates from the broader markets need to be part of the universe.
Then, these stocks must be run through all the quality filters such as high margins, return on equity, return on capital employed, financial leverage, capital allocation, cashflows, and the like.
On the stocks that make the cut, an additional filter needs to be run. This involves the use of valuation metrics to identify stocks that are reasonably priced. Quality, too, must be backed by the right price to make it an attractive proposition.
For better results, investors must be able to pick from across market capitalisations and sectors. If necessary, concentrated exposures could also be taken to make the most of a potentially rewarding trend from the quality pack.
There must be no preconceived notions about quality being restricted to select certain segments or industries alone.
Healthy payoffs
In the declining or bearish market phases such as during October 2021-June 2022, June 2019-March 2020, September-October 2018 and August 2015-February 2016, quality (Nifty 200 Quality 30 TRI) outperformed all other style factors and the broader markets.
During sideways markets such as those seen in January 2011-June 2013, March 2010-June 2012 and June 2009-May 2010, quality again was the best performing style.
However, the strategy could underperform during strong bull markets.
Quality thrives from its ability to limit the downside strongly during drawdowns while somewhat capturing the upside during rallies, so that the overall performance remains healthy.
On a risk adjusted basis, the quality index scores on the return front compared to the broader market Nifty 200 TRI.
When consistency is measured on a rolling return basis, then too quality scores well.
Spotlight Wire Spotlight WireWhen five-year rolling returns from 2010 to 2025 are taken, the Nifty 200 Quality 30 TRI has delivered average returns that are five percentage points higher than the Nifty 200 TRI.Similarly, on three-year rolling returns over 2008-2025, the quality index gave 4.5 percentage points more.
One of the most effective ways to invest in quality businesses is through quality-focused mutual funds. These professionally managed Quality-themed mutual funds rely on thorough research to identify companies with strong financials, sustainable business models, and durable competitive advantages, all while staying disciplined on valuation.
This article is contributed by Lakshmipathi Yelam, Founder,MyFinanciaLPages
Note: Investment returns mentioned are for illustration purposes and not guaranteed. Please consult a financial advisor for personalized advice.
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This story originally appeared on: India Times - Author:Faqs of Insurances
