Quality stocks make better investments – who knew?!
In a blow to the rising popularity of stupidity in equity markets, the team at the Capital Markets Cooperative Research Centre (CMCRC) – the organization that has worked closely with Montgomery Investment Management – has concluded high-quality stocks generally outperform low-quality stocks and provide downside protection during times of market volatility.
In addition to the work CMCRC have done with Montgomery on the subject, CMCRC conducted a study investigating how the quality of stocks owned by mutual funds affected their performance between the years 1990 and 2009.
The report found that funds holding stocks with the lowest levels of quality experienced substantial underperformance and increased volatility.
According to one of the report’s researchers, Camille Schmidt, “quality assets in a portfolio are important, particularly in volatile periods”.
We are delighted that an institution as distinguished as the government-funded CMCRC has formally validated what we have been urging investors to do and what we have been preaching now for years. You simply cannot help but beat an index, with a high-quality portfolio purchased at rational prices, when the index is made up of what is ‘big’ rather than what is ‘good’.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
iankho
:
How about an index fund like the UBS Preferred Research Index? Although, not all the companies in it are A1s the index components do have a bias against poor quality.
Roger Montgomery
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The constituents require a BUY rating from the broker. I am proposing something a little different to buy ratings. They have to be good companies….
carlos.cobelas.1
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trouble is there are too few “quality stocks” in the Aussie market, the likes of Ramsay, REA, Seek etc, so the market prices them up so highly that it is next to impossible to buy high quality stocks at cheap prices….
Matthew Bell
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It is a pity the quality stocks change and I’ve lost out big time on. I really seem to have the knack of selling at maximum pessimism when indeed holding on may have been the best option. When I do get a pick right , it is sold before being recognised by the market (IFM bought in 2010 and sold a year later for small loss). Ok I am going back in my corner right now to try and find Mr and Mrs. Hindsight.
Andrew Legget
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Wow, i am glad someone finally managed to work that out!
Seriously though, i know it comes as no suprise to many of us on here as we live it but i am sure there are many more out there that probably need to hear it.
Although, sometimes i think it might be more beneficial to us if people don’t understand that quality companies make better investments so that we can buy more of it at reasonable prices.
Roger Montgomery
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I agree with that. As buffett suggested we should be endowing university chairs to the teaching of the Efficient Market Theory (and charting too).