Quality focus delivers outperformance

February’s market blip has heightened investor worries about the return of volatility. The go-to strategy for astute investors during volatile times has been investing in profitable companies with strong balance sheets and stable earnings growth.  These characteristics have helped smart investors separate those companies that may be insulated against downturns from those that may fail.

That means sifting through companies to separate those that have strong financials from those that don’t. It would be impossible for Australian investors diversifying internationally to analyse and identify these characteristics for each company around the developed world.

MSCI, one of the world's largest index providers, does the work for us.

MSCI analyses the stocks in its global universe and identifies the companies with the strongest fundamentals for inclusion in its Quality indices.

The VanEck Vectors MSCI World ex Australia Quality ETF (ASX: QUAL) tracks the performance of the MSCI World ex Australia Quality Index (QUAL Index), which includes companies with high quality scores determined by MSCI based on three fundamental factors:

1. high return on equity; 
2. stable year-on-year earnings growth; and
3. low financial leverage.   

That has helped the QUAL Index to outperform. While the MSCI World ex Australia Index fell 6% from its peak in January 2018 during the February market drop and took 77 days to recover.QUAL recovered all of its February losses within 36 days.

Quality has lost less and recovered faster

Volatility is often measured by standard deviation in returns. But for investors, negative outcomes or the potential for losses are the true ‘risk’ they consider when investing. A measure called ‘drawdown’ is useful for investors to assess this aspect of volatility. It demonstrates both the depth of a fall from an historical peak and the pace of the recovery to a new peak. Investments that fall less and recover faster are more desirable.

The chart below shows the drawdown of QUAL versus the broader MSCI World ex Australia Index since the beginning of the year up until the time of drafting this note.  This period captures February’s falls and subsequent recovery.  The MSCI World ex Australia Index took 77 days to recover, while QUAL recovered within 36 days. 

The QUAL Index is able to demonstrate that quality international companies have historically recovered faster over the long term.  The chart below shows the drawdown of QUAL Index versus the broader benchmark MSCI World ex Australia Index for the past 15 years capturing the GFC.  In summary:

• The maximum drawdown of the QUAL Index was -24.28% versus the benchmark -37.79%

• The pace of recovery of the QUAL Index was eight months faster.

In summary, QUAL offers investors one-trade-access to a portfolio of 300 quality International equities and over the long term has demonstrated lower downside and outperformance. That’s because quality investing avoids over leveraging and has offered investors defence during market downturns, as well as enabling portfolios much faster recovery.

^{IMPORTANT NOTICE: This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity and issuer of the VanEck Vectors MSCI World ex Australia Quality ETF (‘Fund’). Nothing in this content is a solicitation to buy or an offer to sell shares of any investment in any jurisdiction including where the offer or solicitation would be unlawful under the securities laws of such jurisdiction. This is general information only and not financial advice.  It is intended for use by financial services professionals only. This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from the Fund.}

^{QUAL is indexed to a MSCI index. QUAL is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to QUAL or the MSCI Index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and QUAL.}

^{QUAL invests in international markets. An investment in QUAL has specific and heightened risks that are in addition to the typical risks associated with investing in the Australian market. These include currency risks from foreign exchange fluctuations, ASX trading time differences and changes in foreign laws and regulations including taxation.}