Anchor Equity Portfolios for Turbulent Markets and Long-Term Results

Key Points

What it is

Quality stocks, anchored by companies with strong fundamentals, may strengthen a portfolio through the market cycle.

Why it matters

Quality has historically limited losses when markets struggle and participated in equity rallies, aiding long-term performance.

Where it's going

Combining quality with other equity styles can prove powerful, such low volatility equities for more risk-averse investors.

When investors struggle with high uncertainty or significant volatility, they often are searching for ways to buttress their portfolios against distress. They could boost their bond allocations at the expense of stocks, but reducing exposure to equities after large selloffs can damage long-term performance.[1] How can investors avoid the urge to sell during down markets to participate in long-term equity-market performance while mitigating risk in their portfolios?

We think anchoring to strong fundamentals is a good start. This means owning companies with plenty of cash flow, high returns on capital, and management that avoids overstretching the balance sheet with empire building. These strong fundamentals define quality — among the so-called equity factors (others include low volatility, which we’ll discuss later, as well as value, momentum, and dividend payers)  that academic studies and our research show has  outperformed the broad equity market over time.[2]

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