The FCF US Quality strategy takes a quantitative active approach to quality factor investing. In this paper, we conduct case studies that illustrate and expose some of the drawbacks embedded in the MSCI USA Sector Neutral Quality Index, and how we seek to improve upon them. Therefore, we believe it could serve as a better quality-factor solution for investors seeking consistent excess return.
Key Issues with Traditional Quality Indexes:
- Sector neutrality constraints can dilute quality exposure
- Earnings-based quality metrics are vulnerable to accounting distortion
- Static rebalancing methodologies miss dynamic quality signals
- Single-factor approaches overlook the multidimensional nature of quality
Our Approach:
- Free cash flow based quality assessment reduces accounting noise
- Multi-factor quality framework captures prudent capex, low accruals, high margins, and asset turnover
- Quantitative active management adapts to changing market conditions
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Originally published on Abacus FCF Advisors FCF Institute