Mutual funds holding high quality stocks perform better in stressful periods, says CMCRC
During market downturns mutual funds perform better with high quality stocks, according to research from the Capital Markets Cooperative Research Centre (CMCRC).
Furthermore, a trend of funds investing in higher quality stocks over time was also identified.
The research examines the link between the quality of assets held by mutual funds and fund performance, using data from the portfolio holdings of US mutual funds between 2000 and 2009.
The analysis showed that high quality stocks offer downside protection in market declines. The research also found funds holding stocks with the lowest levels of quality substantially underperformed and faced increased volatility.
Camille Schmidt, CMCRC PhD Candidate from the Macquarie Graduate School of Management, says: “Our study supports the assertion that quality assets in a portfolio are important, particularly in a volatile period. And with the GFC and one other period of market stress in the timeframe that we looked at, it was no surprise to see funds increasingly investing in higher quality stocks. This is also consistent with the ‘flight-to-quality’ phenomenon we see in other areas of investing."