ESG360 - Fixing the Problem with U.S. Quality Investing
In this episode of ESG360, Joe Mezrich, Nomura’s Head of Equities Quantitative Strategy, shares his insights on how to fix the underperformance of U.S. 'quality' investing.
- One would expect buying stocks of high quality companies would be a good investment. While this is generally true outside of the U.S., long-only quality investment in the U.S. has a history of poor benchmark-relative performance (e.g., iShares MSCI USA Quality ETF, QUAL). We remedy this with a new method for incorporating ESG into quality investment.
- ROE (profitability) is a commonly used measure of company quality. We apply an ESG filter to a long-short sector-neutral ROE quintile factor in the Russell 1000, removing companies with low ESG ratings from the long leg of the factor and removing companies with high ESG ratings from the short leg. This significantly improves performance.
- Company quality scores typically use financial quality measures that miss some company features, like governance issues, which should be part of a complete quality picture. Good quality stocks can outperform in the U.S. if we expand the definition of quality to include ESG.
In this episode of ESG360, Joe Mezrich, Nomura’s Head of Equities Quantitative Strategy, shares his insights on how to fix the underperformance of U.S. 'quality' investing.
Joe’s research found that stocks of high quality U.S. companies like those with good return on equity, have a long record of underperformance even though quality stocks have outperformed in other developed markets. But by adding good ESG features, a losing strategy can be transformed into a winning one, highlighting that quality scores often use measures of financial quality that miss important company features, like governance issues, which form a complete quality picture
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Joseph Mezrich
Head of Equities Quantitative Strategy
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