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MSCI

msci.com

Focus: Quality

VALUE

SIZE

MOMENTUMQUALITYYIELDVOLATILITYGROWTHLIQUIDITY

Factor focus: Quality 1Factor focus:
Quality

Performance &implementation

In the realm of investing, a factor is any characteristic that helps explain the long-term risk andreturn performance of an asset. MSCI Factor Indexes are designed to capture the return of factors
which have historically demonstrated excess market returns over the long run.
MSCI Factor Indexes are rulesbased, transparent indexes
targeting stocks with favorable
factor characteristics – asbacked by robust academic
findings and empirical results– and are designed for simple
implementation, replicability,and use for both traditional
indexed and active mandates.

Defining Quality
The Quality factor is describedin academic literature as
capturing companies withdurable business models
and sustainable competitive
advantages. Quality iscategorized as a “defensive”
factor, meaning it has tended
to benefit during periodsof economic contraction(see “Performance andImplementation”).

2 Factor focus: Quality

The quality factor has helped
explain the movement of stocks
that have low leverage, stableearnings and high profitability.
The MSCI Quality Index employs
three fundamental variables tocapture the quality factor:• Return on equity – whichshows how effectively acompany uses investments
to generate earnings growth;• Debt to equity – a measureof company leverage; and• Earnings variability – howsmooth earnings growth has
been

Why investors
have used quality
strategies

laureates Eugene Fama andKenneth French, economists
known for their groundbreaking
work in explaining stock returns,
recently revised their signature
three- factor model (companysize, company value and marketrisk) to add two quality-related
factors (profitability and asset
growth).
Many active strategies haveemphasized quality growth
as an important factor intheir security selection andportfolio construction.1 In 2012,
Robert Novy-Marx publisheda pioneering paper that foundprofitability and stability werejust as useful for explaining
returns as traditional value
measures.2

MSCI World Factor Indexes
Over time, individual factors have delivered outperformance relative to the market.

WorldWorld Enhanced Value

World Quality

World Equal Weighed

World Minimum Volatility (USD)

World Momentum

World Growth Target

World High Dividend Yield

The MSCI World Quality Index has historically generated excess returns over the long run with a 2.1%
annual return over the MSCI World Index since 1999 as represented above.

The long-term outperformanceof the quality factor against
the market is well documented
in financial literature. Nobel
Factor focus: Quality 3

How factors have performed
relative to each other:

Long-term performance: December 1999 - December 2023
Long-term performance

Quality

Although factor strategies have exhibited long-term outperformance, in the short-term, factor
performance has been cyclical and has generated periods of underperformance.

Many active strategies haveemphasized quality growth as animportant factor in their security
selection and portfolio construction.

4 Factor focus: Quality

WorldWorld Enhanced Value

World Quality

World Equal Weighed

World Minimum Volatility (USD)

World Momentum

World Growth Target

World High Dividend Yield

The analysis and observations in this report are limited solely to the period of the relevant historical data, backtest or simulation. Past performance — whether actual, back tested or simulated — is noindication or guarantee of future performance. None of the information or analysis herein is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind ofinvestment decision or asset allocation and should not be relied on as such. The time periods covered in the charts in this paper were dictated by the data available when we conducted the simulations
which produced them. There are frequently material differences between backtested or simulated performance results and actual results subsequently achieved by any investment strategy.

Factor focus: Quality 5

Conclusion
The quality factor aims to reflect the performance of companies
with durable business models and sustainable competitive
advantages. This is achieved by targeting companies that tend tohave high ROE, stable earnings, and strong balance sheets withlow financial leverage. Institutional investors consider quality for
additional sources of return and/or for diversification purposes.
Quality has also traditionally served as a defensive factor when aflight to quality occurs.

Footnotes
1 Asness, C. S., A. Frazzini and L.H. Pederson, L. H. (2013). “Quality Minus Junk,”
s.l.: Working Paper, AQR Capital Management.
2 Novy-Marx, R. (2012). “The Other Side of Value: The Gross Profitability
Premium.” Journal of Financial Economics, Volume 108, pp. 1-28.

Learn more about Factor Investing at
www.msci.com/factor-investing

About MSCI Inc.
MSCI is a leading provider of critical decision support tools
and services for the global investment community. With
over 50 years of expertise in research, data and technology,
we power better investment decisions by enabling clientsto understand and analyze key drivers of risk and returnand confidently build more effective portfolios. We create
industry-leading research-enhanced solutions that clientsuse to gain insight into and improve transparency across theinvestment process.
To learn more, please visit www.msci.com.

The information contained herein (the “Information”) may not be reproduced or redisseminated in whole or in part without prior written permission from MSCI ESG Research. The Information may not be
used to verify or correct other data, to create any derivative works, to create indexes, risk models, or analytics, or in connection with issuing, offering, sponsoring, managing or marketing any securities,
portfolios, financial products or other investment vehicles. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction.
MSCI ESG Research is provided by MSCI Inc.’s subsidiary, MSCI ESG Research LLC, a Registered Investment Adviser under the Investment Advisers Act of 1940. MSCI ESG Research materials, including
materials utilized in any MSCI ESG Indexes or other products, have not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body.
None of the Information or MSCI index or other product or service constitutes an offer to buy or sell, or a promotion or recommendation of, any security, financial instrument or product or trading strategy.
Further, none of the Information is intended to constitute a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. MSCI ESG and climate
ratings, research and data are produced by MSCI ESG Research LLC, a subsidiary of MSCI Inc. MSCI ESG Indexes, Analytics and Real Estate are products of MSCI Inc. that utilize information from MSCIESG Research LLC. MSCI Indexes are administered by MSCI Limited (UK) and MSCI Deutschland GmbH . The Information is provided “as is” and the user of the Information assumes the entire risk of anyuse it may make or permit to be made of the Information. NONE OF MSCI INC. OR ANY OF ITS SUBSIDIARIES OR ITS OR THEIR DIRECT OR INDIRECT SUPPLIERS OR ANY THIRD PARTY INVOLVED INTHE MAKING OR COMPILING OF THE INFORMATION (EACH, AN “INFORMATION PROVIDER”) MAKES ANY WARRANTIES OR REPRESENTATIONS AND, TO THE MAXIMUM EXTENT PERMITTED BY LAW,EACH INFORMATION PROVIDER HEREBY EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. WITHOUTLIMITING ANY OF THE FOREGOING AND TO THE MAXIMUM EXTENT PERMITTED BY LAW, IN NO EVENT SHALL ANY OF THE INFORMATION PROVIDERS HAVE ANY LIABILITY REGARDING ANY OF THEINFORMATION FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL (INCLUDING LOST PROFITS) OR ANY OTHER DAMAGES EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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Factor focus: Quality 7