Staying the course with quality
Recent geopolitical tensions between the US and North Korea have added to the wall of worry for investors and while US equity valuations have reached record highs in 2017, a hawkish US Fed is keeping investors awake at night.
Astute investors know they can’t time the market and make long term investments in companies that exhibit ‘quality’, which has been proven to be a successful investment strategy over time. Quality investing avoids leverage and offers investors defence during market downturns, as well as enabling portfolios much faster recovery.
North Korea adds to the wall of worry
The current global environment is characterised by rising uncertainty. The past week’s headlines featured an exchange of threats between the Presidents of US and North Korea. The market reacted accordingly and it gives investors another unknown to consider, among many other things including:
- The US Fed’s next move
- Potential US inflationary pressure which is being exacerbated by the falling US dollar as well as big spending programs
- Global sovereign debt levels
Quality focuses on strong balance sheets and stable earnings
During times of uncertainty the go-to strategy for astute investors has been investing in profitable companies with strong balance sheets and stable variability. These characteristics help 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. Quality companies such as Alphabet (Google), Apple, Johnson & Johnson and Roche have strong balance sheets, as the following table reveals:
Quality offers defence
VanEck Vectors MSCI World ex Australia Quality ETF (QUAL) tracks the performance of the MSCI World ex Australia Quality Index, which includes companies with high quality scores determined by MSCI based on three fundamental factors:
high return on equity;
stable year on year earnings growth; and
low financial leverage.
Quality has lost less and recovered faster
No investor wants to lose money and timing the top or bottom of a market cycle is nothing short of miraculous. To understand how a strategy could perform in the current environment a risk measure called ‘drawdown’ demonstrates both the depth of a fall from an historical peak and the pace of the recovery to a new peak. The maximum drawdown is the distance from the highest peak to the deepest valley. Investments that fall less and recover faster are more desirable.
The chart below shows the drawdown of the QUAL’s Index versus the broader MSCI World ex Australia Index for the past ten years capturing the GFC. In summary:
The maximum drawdown of the QUAL Index was 24.28% versus MSCI World 37.79%
The pace of recovery of the QUAL Index was eight months faster.
Quality delivers long term outperformance
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.