Quants Find Quality Boosts Stock Performance Most in Six Years

(Bloomberg) -- Despite a rally that’s added $2.5 trillion to the value of U.S. stocks, traders are showing a growing preference for companies that are more insulated from an economic downturn.

Firms with strong balance sheets are rising at the fastest pace relative to their weaker counterparts in six years, according to indexes run by Goldman Sachs Group Inc. Exchange-traded funds that focus on more stable companies have taken in more than $2 billion since Dec. 31, data compiled by Bloomberg Intelligence show. If that holds or grows, it will be a record year for the funds.

It’s a testament to the prudence that remains after the fourth quarter meltdown, even as equity markets rebound higher. From moms and pops to hedge funds and institutions, investors have been slow to embrace the stock rally. So far, 2019 has seen the worst start to a year since 2008 for equity flows, according to Bank of America Merrill Lynch. Yet quality stocks have emerged as a clear favorite.

“People have called it the most unloved economic expansion because people have always been assuming it’s going to end,” said Ed Campbell, a managing director and money manager for QMA. “That preference for high quality companies is a reflection of the caution you’ve seen among investors in the post-crisis environment.”

The iShares Edge MSCI USA Quality Factor ETF, the largest ETF that tracks these companies, saw its second-largest inflow of the year on Tuesday, adding $175 million, data compiled by Bloomberg show.

To contact the reporter on this story: Sarah Ponczek in New York at sponczek2@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rachel Evans, Rita Nazareth

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