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Quality investing in an Australian context

Author

Listed:
  • David R Gallagher

    (Macquarie Graduate School of Management, Australia; Capital Markets CRC Limited, Australia; Centre for International Finance and Regulation, Australia; Australian School of Business, The University of New South Wales)

  • Peter A Gardner

    (Plato Investment Management, Australia)

  • Camille H Schmidt

    (Macquarie Graduate School of Management, Australia; Capital Markets CRC Limited, Australia)

  • Terry S Walter

    (Finance Discipline Group, University of Technology, Australia; SIRCA Limited, Australia)

Abstract

This study extends an examination of Quality investing in the US to the Australian market. Specifically, a Quality score is computed as the aggregate of eight fundamental accounting metrics. An investment strategy investing in the highest (lowest) quality stock quintile, that is, Quintile 5 (1) generates an average annual Daniel, Grinblatt, Titman and Wermers (DGTW)-adjusted alpha of 6.37% (−7.98%), which is significant at the 5% level over April 2000–March 2010. A two-way segmentation based on size first, and quality second, reveals that the strong positive quality effect is primarily driven by small stocks, as the average DGTW-alpha for the top-quality tercile of small stocks is 14.02%, significant at the 5% level. Statistically significant positive DGTW-alphas are also determined for quality micro and large stocks. The quality analysis is also applied to a sample of Active Equity Mutual Funds’ stock holdings. Weak evidence of the quality return premium is detected at the fund level.

Suggested Citation

  • David R Gallagher & Peter A Gardner & Camille H Schmidt & Terry S Walter, 2014. "Quality investing in an Australian context," Australian Journal of Management, Australian School of Business, vol. 39(4), pages 615-643, November.
    • Handle: RePEc:sae:ausman:v:39:y:2014:i:4:p:615-643
    DOI: 10.1177/0312896213501180
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