Quality Assurance: Demystifying the Quality Factor in Equities and Bonds

Abstract

This article focuses on the cross-asset-class properties of quality as a factor, particularly its joint behavior across equities and fixed income. The authors aim to provide further insight into quality, a relatively newer factor, and to shed light on the implications for portfolio allocation. Their results show that the correlation between quality variants in equities and fixed income is actually historically lower than that between equities and fixed-income core benchmarks. A 60/40 allocation to the quality cross-asset-class mix offers a statistically significant return, with lower tail risk reflecting the greater possible diversification benefits from factor allocations compared to traditional cap-weighted allocations.

TOPICS: Analysis of individual factors/risk premia, portfolio construction