A global fund manager has advised investors not to overlook quality equities in the current philosophical debate as to whether growth or value stocks currently offer the best opportunities for strong returns.
“Quality has been the best-performing theme in the eight months to 31 August 2021. The MSCI World Quality Index has outperformed the MSCI World Index by 4 per cent year-to-date. Compare this to the MSCI World Growth Index only up 0.9 per cent and MSCI World Value Index down 1.2 per cent,” State Street Global Advisors head of portfolio management for Australia active quantitative equities Bruce Apted revealed.
Apted pointed out quality stocks generally deliver excess returns in down markets and outperform during times of rising inflation.
“Quality can be viewed from various perspectives, but the one most relevant to inflation relates to the ability for a company to sustain high levels of profitability and high margins in the face of competitive and difficult trading conditions,” he noted.
“Highly ranked quality companies tend to have greater pricing power, having the ability to pass on rising input costs to the end customer and maintain margins. In recent times many companies have been tested with rising input costs.”
With regard to down markets, he noted the trends stock exchanges are currently experiencing are pointing toward an impending market correction.
“Statistically speaking we expect monthly returns of less than 5 per cent about 10 per cent of the time, or about one in every 10 months. At the end of August we haven’t had one for 17 months, so it could be argued it is a bit overdue,” he said.
Further, he recommended investors revisit their portfolio weightings should a market correction take place and identified certain industry sectors to consider in these circumstances.
“The consumer staples and healthcare sectors are the most defensive sectors followed closely by the themes of lower volatility and quality. As you would expect, more cyclical themes tend to underperform the most in down markets,” he said.''