Europe Quality Min-Volatility

The Europe Quality Min-Volatility portfolio is constructed from the top quantile of European stocks based on quality characteristics and which experience minimum return covariances with the investment universe (stocks from the categories ‘Stocks Europe’ and ‘Stocks Germany’). Profitable, safe, growing and high-payout stocks are shown to be more robust to market corrections and are favorable in times when investing decisions become more dependent on the underlying characteristics of stocks. The portfolio is tilted towards the defensive sectors and is capped with its exposure to stocks from the industrial- and energy-sector with a maximum exposure of 8% and 7%, respectively. The portfolio will be updated monthly.
To evaluate stocks on the basis of quality criteria, the methodology in Asness, Frazzini, and Pederson Quality Minus Junk (2013) was adopted. Rewriting Gordon’s growth model, one can define four variables that explain quality based on the ratio of price-to-book-value of a stock,
P/B= (profitability*payout ratio)/(required return-growth)
For each variable, several measures were considered:
Profitability: gross profits-to-assets, ROE, ROA, cash flow-to-assets, gross margin and accruals.
Growth: the 3-year growth in each of the profitability measures
Safety: Market Beta (STOXX 600 was used as market index), idiosyncratic volatility, low leverage, low ROE volatility.
Payout: net equity issuance, net debt issuance and net payout-to-profits
In order to ensure comparability among the variables, z-scores are computed for each the considered variables. The total sum of the z-scores returns a quality score for each stock.
To estimate a robust covariance matrix of returns, a multi-factor model of returns was constructed which significantly reduces the number of estimators. The considered approach stems from the BARRA U.S. Equity Model and considers as factors: Volatility, Momentum, Size, Growth, Leverage, B/P and Currency Sensitivity. mehr anzeigen