Implementing a Systematic Long-only Quality Strategy in the Hong Kong Market

Abstract

We believe investors should be willing to pay a higher price for higher quality companies. We build a composite quality score, including one which incorporates publicly available ESG scores, using 'off-the-shelf' criteria and publicly available financial data and show that a quarterly-rebalanced, long-only portfolio of top-decile stocks selected using our score in Hong Kong significantly outperforms the Hang Seng Composite LargeCap Index (HSLI) - both in terms of absolute returns (by 2.87% pa) and risk adjusted returns - while having an moderate annual turnover (a mean turnover of 42.15%). 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. Furthermore, we demonstrate that quality needs to be reviewed regularly - and the moderate turnover ensures this. 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 Hong Kong market. We show that socially conscious investors can generate risk adjusted returns in excess of the HSLI in the Hong Kong market using a systematic strategy.

Keywords: Accounting Variables, ESG, Factors, Growth, Hong Kong, Investing, Profitability, Quality, Quantitative, Safety, Systematic

JEL Classification: G1, G11, G14