QUALITY IS KING IN AUSTRALIAN EQUITY INVESTING SAY RESEARCHERS
Investment study shows one way “Flight to Quality” is the way forward for Australian retirees in the long term, especially as it comes with “downside protection”.Future retirees and the baby boomer generation in particular face considerable challenges ahead when they retire, given their generally inadequate superannua- tion balances. A study by Camille Schmidt, Peter Gardner and Professors David Gal- lagher and Terry Walter examines “Quality” as a long term investment strategy in the Australian investment market. The research results suggest that a strategy of holding only quality stocks will benefit retirees in the long term. Quality investing involves targeting stocks which are characterised by strong profitability, operating efficiency and financial health. When markets go into a downturn, quality stocks outperform other stocks – which is of considerable im- portance when looking at long term returns. A report by Griffith University calcu- lated that “a single, poorly-timed negative return event (of around -20%) can raise the probability of [financial] ruin [of one’s superannuation] from 33% to 50% for average life expectancy,” which highlights the importance of equity research that focuses on downside protection to minimise the damage of “once in a lifetime” financial shocks. Camille’s research investigates the performance of quality stocks and mutual funds in Australia from 2000 to 2010. The study is an extension of CMCRC research in the U.S. which found that high quality stocks and funds do not outperform low quality stocks and funds during normal times but do outperform these during times of market stress, like the GFC (i.e., high quality provides downside protection). The research defines quality using a quality score called a ‘Q-Score’, which is a composite of eight fundamental accounting ratios (e.g. return-on-equity, return-on-assets, operating cash flow and the like) which reflect the profitability, operating efficiency and financial health of the company. In contrast to the U.S. research, Camille’s Australian research finds that quality stocks and funds do outperform the others in normal times and the performance in the smaller quality stocks was particularly strong. It was noted that the outperformance was less for the quality funds than the quality stocks and that the better CMCRC Project Leader performing funds tended to be the smaller boutique funds. During bad times, Macquarie Graduate School of the research (like the U.S. research) found that the quality stocks and funds outper-Management formed their lower quality rivals, offering investors in quality a good measure of downside protection.