Glossary
Quality (factor)
Favouring profitable, stable, low-debt companies. Another standard factor we tested; it too lost to a cap-weighted index out-of-sample after cost.
In plain terms
Typical quality screens look at return on equity, earnings stability and leverage. The puzzle is why obviously good companies should be systematically underpriced at all — and the honest answer is that, much of the time, they aren't: quality is visible to everyone and priced accordingly.
Quality tends to shine in downturns and lag in sharp rallies. Averaged across regimes in our tests, that defensiveness wasn't enough to beat simply owning the whole market after costs.
Related terms
Educational definitions only. Not investment advice.