quality beats all factors since 1963

The single factor that has consistently delivered excess returns over all economic cycles since 1963, is going long high quality stocks, or profitable firms, and shorting their low quality, unprofitable counterparts. And the power of the factor has not diminished. Other factors have waxed and waned.

paraphrased quote from



Similar data from portfoliovisualizer:

Dec 2000 to Dec 2020               Annualized      Annualized
       Factor             Key        Return    Standard Deviation
  Bet Against Beta      AQR-BAB       9.4%           13.1%
  Expected Growth         Q-EG        4.9%            7.6%
        Size            AA-SMB        4.8%           10.7%
    Profitability       FF-RMW        3.6%            7.7%
Short Term Reversal     FF-STREV      3.5%           12.5%
      Quality           AQR-QMJ       3.3%            9.4%
     Size (FF5)         FF-SMB5       3.1%            9.3%
        Size              Q-ME        3.0%            9.3%
     Size (FF3)         FF-SMB        3.0%            8.9%
        Value           AA-HML        2.9%           11.7%
        Size            AQR-SMB       2.8%            8.4%
  Return on Equity       Q-ROE        1.7%           10.0%
     Investment         FF-CMA        1.4%            6.4%
        Value         AQR-HML-DEV     1.2%           13.4%
     Investment          Q-I/A        0.9%            6.6%
      Momentum          AQR-MOM       0.9%           17.9%
      Momentum          FF-MOM       -0.1%           17.7%
      Quality           AA-QMJ       -0.6%            9.6%
 Long Term Reversal     FF-LTREV     -1.0%            9.1%
      Momentum          AA-MOM       -1.0%           15.5%
        Value           FF-HML       -1.2%           10.1%
        Value           AQR-HML      -1.2%            9.4%

Most of these factors use long-short portfolios that are market neutral, but “Bet Against Beta” overweights the long portfolio:
“A BAB factor is a portfolio that holds low-beta assets, leveraged to a beta of 1, and that shorts high-beta assets, de-leveraged to a beta of 1. For instance, the BAB factor for U.S. stocks achieves a zero beta by holding $1.4 of low-beta stocks and short-selling $0.7 of high-beta stocks.”

Q-EG uses cash from operations, change in ROE, and Tobin’s q to predict future earnings growth (cash-based profitability outperforms earnings-based profitability in forecasting returns).

FF-RMW is annual revenues minus cost of goods sold, interest expense, and selling, general, and administrative expenses divided by book equity. This is similar to ROE, but maybe does not expense R&D.

---- links ----

Hou, Kewei and Mo, Haitao and Xue, Chen and Zhang, Lu, An Augmented q-Factor Model with Expected Growth (January 27, 2020). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3525435