A while ago I was part of a conversation amongst a group of friends, we were discussing markets and approaches to investing. At a certain point one of group said, ‘you just need to buy high calibre equities’. While that sentiment makes perfect sense and is logical for any investor to understand, it did make me think: well, how do you define ‘high calibre equities’? As people in the investment industry we intuitively know how you might define it but I did wonder how the average retail investor without professional experience might define a ‘high calibre’ stock and how I could convey it to them.

Enter: Quality. The Quality factor to be precise. ‘Wait, what’s a factor?’, I hear you say. In investing, a ‘factor’ is simply a characteristic or common trait of certain stocks that helps to explain them and explain the drivers of their performance. I’m sure you will be familiar with the concept of Value investing, made famous by the likes of Warren Buffet. Well, Value is an example of a factor. Value stocks are stocks that are cheap compared to their earnings or assets. In a similar way, you will probably be familiar with Growth stocks. Growth is also an example of a factor. Growth is a factor that explains why stocks that exhibit the Growth factor characteristics perform in the way that they do. Growth and Value are two of the most recognized factors, even though there are actually many different other factors.

Quality is also another of these factors. A very robust one and a key driver of investment returns over time too. So going back to my friends’ conversation, stocks exhibiting the Quality factor can generally be thought of as ‘high calibre’. But how do we define Quality stocks? Essentially these are companies with durable business models and clear competitive advantages, low leverage, stable earnings and high profitability. A good example is Microsoft.

The long-term performance of Quality is well documented and did you know that over a 10 year period the MSCI World Quality index is the only factor that has outperformed the market over a 10 year, 5 year, 3 year and 1 year horizon? Other factors like Growth, Value and Momentum have all underperformed the market at certain times.

So going back to the question I asked myself, to for the everyday investor to buy ‘high calibre equities’ I would consider to invest in an ETF giving exposure to the Quality factor. There are many established Quality Factor ETFs in the marketplace which are tracking and replicating indexes like MSCI World Quality, therefore offering investors the chance to gain broad ownership of a wide range of high quality companies that have the traits that I mentioned above like high profitability, low leverage, stable earnings etc, and offering sustained performance and returns over time. Seek out a Quality Factor ETF or a Quality Index ETF.

Not financial advice, posts for informational purposes only, always do your own research.