Research Insight - Flight to Quality: Understanding Factor Investing
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Research Insight - Flight to Quality: Understanding Factor Investing
categories: Indexes, Americas, EMEAI, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Asia Pacific, Asset Owners, Hedge Funds, Equities, Research Paper, CHIA Chin-Ping, Asset Managers (Quant or Fundamental), BARMAN Subhajit, HUNG Raphael, LIM Eugene, MUTHUKRISHNAN Anand, general
The quality factor has worked best in a "risk-off" market environment. Yet quality is not as well understood as other factors, despite being deeply embedded in Benjamin Graham’s value investing philosophy. In this Research Insight, we argue that the quality of a company can generally be evaluated along five key dimensions: Profitability, Earnings Quality, Financial Leverage, Asset Growth and Corporate Governance. Investors can replicate a variety of quality indexes, depending on their objectives and their capacity constraints. When a flight to quality occurs, this factor historically has served as an important defensive tool in portfolio construction.