Value Investing: Have You Been Using The Wrong Quality Ratio?

Have You Been Using The Wrong Quality Ratio? by Tim du Toit, Quant Investing

Do you think adding a company quality ratio to your investment strategy can make a difference to your returns?

As you know we are sceptical as our experience testing quality ratios in the research paper Quantitative Value Investing in Europe: What Works for Achieving Alpha was mixed.

What doesn’t work

We found that Return on invested capital (ROIC) and return on assets (ROA) weren’t good predictors of returns.

Even though high quality companies did do better than low quality companies (low ROIC and ROA) returns did not increase in a linear way as you moved from low quality to high quality companies.

And if you only invested in high...