Successful investing has always centred around companies that demonstrate superior profitability over time. Today’s profitable companies have a tendency to continue being profitable tomorrow as well. According to Novy-Marx (2012) “… profitable companies are less prone to distress, have longer cash flow durations and have lower levels of operating leverage”. It is no wonder then, why investors are constantly looking for such investment opportunities. There is a strong logic behind this. Companies with an established track record of earnings levels tend to point toward the existence of a capable management team that will - in turn - be likely to continue being successful in the future. Recent academic research seems to point toward the existence of a quality risk premium which has been harvested by successful investors in the past. In a recent thought-provoking paper, Asness et al. (2012) argue that Warren Buffet’s success is linked to “… his preference for cheap, safe and high-quality stocks”. While the definition of each of these important company traits may change a bit from investor to investor, there is no doubt that these principles have a very powerful appeal for the investing community. In this context, the question that we at STOXX have been asking ourselves is whether we could design an intuitive and straightforward framework that would capture the company quality premium in a purely mechanical way, over time. We have done precisely that and have now launched the following indices (all of which are part of the STOXX Strong Quality1 Index Family):

» STOXX Global Strong Quality 50 (selected from the underlying STOXX Global 1800 Index)
» STOXX Europe Strong Quality 30 (selected from the underlying STOXX Europe 600 Index)
» STOXX Asia/Pacific Strong Quality 30 (selected from the underlying STOXX Asia/Pacific 600 Index)
» STOXX USA Strong Quality 50 (selected from the US portion of the underlying STOXX North America 600 Index)

As the above list demonstrates, STOXX has launched a global product, two regional products and a country product. We have decided to launch a US-centric product (as opposed to a North American regional product) because of the importance, vastness and the liquidity of the US market. Naturally, US companies are eligible for the STOXX Global Strong Quality 50 Index as well because of the participation of US companies in the wider STOXX Global 1800 Index. This paper is organized as follows: the next section discusses the data and the rationale behind the methodology that we employ for the purpose of index calculations. That is followed by the results section where we discuss historical performance. Finally, concluding remarks bring the paper to an end.

Strong Quality Family - A different index solution