The Quality Spectrum: Stability in an Unstable World

GMO

Tom Hancock, Lucas White

Research

7 Pages

GMO explores how quality companies and junk companies sit at opposite ends of the equity risk spectrum in a fragile macro backdrop. The authors argue that markets reward resilient cash generative businesses more than theory implies and build a Quality Spectrum strategy that goes long quality and short junk to harness this pattern.

Date published: May 2023

Key Takeaways

Quality companies defined: Quality companies exhibit strong profitability, stable earnings and low leverage which helps them endure stress and reinvest through cycles.
Junk stocks profile: Junk stocks feature fragile business models and high sensitivity to downturns making them natural candidates for the short side.
Quality Spectrum structure: Quality Spectrum combines long quality and short junk and has delivered roughly 15% annual returns since inception.
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