Quality has been the best performing investment theme in the eight months to September with the MSCI World Quality Index outperforming the MSCI World Index by 4.0% year to date, according to State Street.
Meanwhile, the MSCI World Growth Index rose 0.9% and the MSCI World Value Index fell -1.2%.
Bruce Apted, State Street’s head of portfolio management – Australia active quantitative equities, said quality appeared particularly well placed in the current environment of market uncertainty driven by delta variant disruptions, global vaccine supply bottlenecks, rising input costs reducing corporate profits and high rates of inflation.
“Quality tends to generate excess returns during down markets but importantly tends to outperform during rising inflation,” Apted said.
“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 said highly ranked quality companies tended to have greater pricing power, meaning the ability to pass on rising input costs to the end customer and maintain margins.
This meant higher quality companies have been able to pass rising input costs on to the end customer, therefore maintaining profitably and holding their high margins, according to Apted.
“During the most recent reporting season the better ranked quality companies have navigated this environment better and have outperformed,” he said.
