Investment Returns to Quality in Developed Markets

Abstract

Quality, defined as companies with high returns on capital, good quality of earnings, and low leverage, has substantial superior investment return predictability. Quality firms as selected by our strategy generate substantially superior returns even though they are significantly larger than the average company in terms of market capitalization. Further, returns from quality are higher than the benchmark even though risk as measured by standard deviations as well maximum drawdowns is lower than the market.

Keywords: Quality, Equities, Stocks, Finance, Returns on Capital, Quality of Earnings, Free Cash Flow, Leverage, Debt, Drawdown, Low Risk

JEL Classification: G10, G11, G12, G14, C22