Implementing a Systematic Long-only Quality Strategy in the Indian Market

23 Pages Posted: 26 Nov 2019 Last revised: 27 Nov 2019

Date Written: November 21, 2019

Abstract

We believe investors should be willing to pay a higher price for higher quality companies. We build a composite quality score using 'off -the-shelf' criteria and publicly available financial data and show that a quarterly-rebalanced, long-only portfolio of 12 stocks selected using our score in India significantly outperforms the NIFTY 100 Index - both in terms of absolute returns (by 5.50% pa) and risk adjusted returns - while having an acceptable annual turnover (a modal turnover of 41.67%). We show that our quality score predicts the persistence of quality for up to 3 years and there is a weak relationship between the price multiple and the quality score. We show that ESG criteria can be incorporated into a quality measure. Furthermore, we demonstrate that quality needs to be reviewed regularly - so a buy-and-hold approach may not be an ideal strategy for an investor. In the absence of cheap ETFs to get systematic exposure to quality, the systematic long-only strategy using 'off -the-shelf' criteria provides a practical, executable systematic investment methodology that exposes an investor to quality in the Indian market.

Keywords: Accounting Variables, ESG, Factor Investing, India, Growth, Profitability, Quality, Safety, Systematic

JEL Classification: G1, G11, G14

Suggested Citation

Raju, Rajan, Implementing a Systematic Long-only Quality Strategy in the Indian Market (November 21, 2019). Available at SSRN: https://ssrn.com/abstract=3490999 or http://dx.doi.org/10.2139/ssrn.3490999

Rajan Raju (Contact Author)

Invespar Pte Ltd ( email )

Singapore

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