Financial Analysts Journal 18 March 2019 Volume 75 Issue 2
What Is Quality?
Unlike standard factors, such as value, momentum, and size, “quality” lacks a commonly accepted definition. Practitioners, however, are increasingly gravitating to this style factor. They define quality to be various signals or combinations of signals—some that have been thoroughly explored in the academic literature and others that have received limited attention. Among a comprehensive group of the quality categories used by practitioners, we find that profitability, accounting quality, payout/dilution, and investment tend to be associated with a return premium whereas capital structure, earnings stability, and growth in profitability show little evidence of a premium. Profitability and investment-related characteristics tend to capture most of the quality return premium.
About the Author(s)
Jason Hsu is founder, chairman, and chief investment officer of Rayliant Global Advisors, a global investment management group specializing in quantamental Chinese equity strategies. He also co-founded Research Affiliates, a leader in smart beta and asset allocation. Mr. Hsu is an adjunct professor in finance at the UCLA Anderson School of Management and a visiting professor at Tsinghua University, Kyoto University, and Taiwan National Chengchi University. He is on the editorial board of the Financial Analysts Journal, the Journal of Investment Management, the Journal of Investment Consulting, and the Journal of Index Investing. Mr. Hsu has published more than 40 journal articles and is a contributing author of nine handbooks in finance and economics. He has won three Graham and Dodd Awards, one FAJ Readers’ Choice Award, three Bernstein Fabozzi/Jacobs Levy Outstanding Research Awards, and three William Sharpe Best Research Awards. Mr. Hsu received a bachelor of science degree from Caltech, a master of science degree from Stanford University, and a PhD in finance from the UCLA Anderson School of Management.
Vitali Kalesnik is a partner and senior member of the investment team at Research Affiliates, leading research and business strategy in the European region. Previously, Dr. Kalesnik led the equity research team, and he continues to perform general equity-related research. Dr. Kalesnik has co-authored articles that were recognized with three Graham and Dodd Scroll Awards, a Financial Analysts Journal Readers’ Choice Award, a William F. Sharpe Indexing Achievement Award, a Bernstein Fabozzi/Jacobs Levy Award, and a Graham and Dodd Award for "What is Quality." His research strengthens and expands Research Affiliates’ products—in particular, the RAFI Fundamental Index strategies—and supports the firm’s global tactical asset allocation products. He speaks fluent English, Russian, and French. Dr. Kalesnik earned a PhD in economics from the University of California, Los Angeles, where he was a winner of the UCLA Graduate Division Fellowship.
Engin Kose is a senior analyst with the systematic team at Allianz Global Investors. His expertise in alpha research and dynamic multi-factor strategies complements the team’s behavioral finance-focused investment process. Dr. Kose has more than 10 years of investment industry experience. Previously, he worked at Research Affiliates. Dr. Kose has authored many published articles and submissions on optimal portfolio construction, including diversification, component weighting, and asset quality and strategy constraints. He earned a BA in economics and mathematics at McGill University and a PhD in finance from Washington University in St. Louis.