Investing in “high-quality” stocks sounds like a no-brainer. But in a very interesting piece on ETF.com, Vitali Kalesnik and Engin Kose of Research Affiliates show that quality metrics alone don’t provide the boost to returns you might expect. (H/T Stingy Investor)

Kalesnik and Kose examined the performance of stocks picked using dozens of different “quality” factors (such as return on equity, return on assets, and margin stability) over the past 50 years or so.
“Of the 40 measures we examined, 25 have positive performance, including 6 whose results are statistically different from zero,” they say. “Of the 9 reported in the literature, 8 had positive returns, and 5 of these were statistically significant. Of the 31 unpublished factors, 18 had positive performance, and only 1 was statistically significant. These results are indistinguishable from random occurrences.”

But Kalesnik and Kose found something interesting when they added value factors to the mix. “The high-quality portfolio has fewer distressed, slow growing, unprofitable companies with potentially questionable accounting practices,” they write. “As a result, the high-quality value portfolio has a better risk-adjusted return. Quality is not, in itself, a factor that generates a premium; but value investing conditioned on a properly specified concept of quality is a powerful investment strategy.”