Why it pays to buy quality Australian companies

Globally, evidence has long suggested that so-called ‘quality’ companies i.e. those able to maintain a consistently high return on equity, without undue leverage, tend to be able to produce good shareholder returns over time.

Indeed, none other than the famed investor Warren Buffett has identified these as key metrics he considers when picking stocks.

This stands to reason. After all, if a company can generate high profits relative to its invested equity, it should be well-positioned to provide attractive investor returns over time – through either high dividends and/or high earnings growth from the reinvestment of profits.

This has been borne out in the results. For example, the index which the?BetaShares Global Quality Leaders ETF (QLTY)?aims to track?1?has outperformed the benchmark MSCI World Equity Index in $A terms by 2.5% p.a. from its inception in December 2002 to 31 March 2022.

Quality also works in Australia

The benefits of a quality exposure within one’s investment portfolio need not be limited to global companies – it stands to reason that quality Australian companies should also be able to provide attractive shareholder returns over time.

This is evident in the performance of the Solactive Australia Quality Select Index, which the recently-launched?BetaShares Australian Quality ETF (AQLT)?aims to track. Rather than just weight stocks by their market capitalisation, this index favours companies with a high ‘composite quality score’, which in turn is based on key financial metrics of return on equity, debt to equity, and relative earnings stability over the last five years2.

As seen in the chart below, the Index which the AQLT ETF aims to track (before fees and costs) has delivered returns in excess of the benchmark S&P/ASX 200 Index over the long term. From its inception in June 2011, the

Solactive Australia Quality Select Index has produced returns of 10.6% p.a. to 31 March 2022, compared with 9.4% p.a. for the S&P/ASX 200 Index.

Attractive diversification potential and financial metrics

Given the Australian market is top heavy with financial and mining stocks, exposure to the quality factor also offers Australian investors potential diversification benefits. AQLT’s Index has tended to have different sector weightings to benchmark Australian equities indices such as the S&P/ASX 200 Index.?As of 31 March 2022, AQLT’s Index has lower exposure to the materials (mining) sector relative to the overall market, and higher exposure to sectors such as consumer discretionary.

The favourable financial metrics of AQLT’s index are also evident from indicators such as return on equity and the debt-to-equity ratio. As seen in the chart below, the index of companies which the AQLT ETF aims to track had a higher average return on equity and lower debt-to-equity ratio than the broad market as of 31 March 2022.

AQLT is designed to provide an easy, transparent and cost-effective way for Australian investors to gain exposure to a highly diversified portfolio of quality Australian companies that have the potential to sustain high returns on equity – and hence potential to outperform the benchmark Australian shares index – over the long term.

AQLT can be accessed on the ASX just like a company share, at a cost-effective management fee of 0.35% p.a. or just $35/year for every $10,000 invested.

This article contains general information only and does not take into account any person’s objectives, financial situation or needs. Investors should consider its appropriateness taking into account such factors and seek financial advice. Past performance is not indicative of future performance. BetaShares Capital Limited (ABN 78 139 566 868 AFSL 341181) (BetaShares) is the issuer of the BetaShares Funds. Before making an investment decision, investors should consider the Product Disclosure Statement, available at?www.betashares.com.au. Investors may also wish to consider the relevant Target Market Determination, which sets out the class of consumers that comprise the target market for the BetaShares Fund and is available at?www.betashares.com.au/target-market-determinations. Investments in BetaShares Funds are subject to risk. Any BetaShares Fund that seeks to track the performance of a particular financial index is not sponsored, endorsed, issued, sold or promoted by the index provider. No index provider makes any representations in relation to the BetaShares Funds or bears any liability in relation to the BetaShares Funds.