CMCRC conducted a study investigating how the quality of stocks owned by mutual funds affected their performance between the years 1990 and 2009.
The report found that funds holding stocks with the lowest levels of quality experienced substantial underperformance and increased volatility.
It also found the performances of low- and high-quality funds differ extensively during times of market uncertainty.
One of the report's researchers, Camille Schmidt, said the study supports the notion that “quality assets in a portfolio are important, particularly in volatile periods”.
“Further research exploring how a timing strategy could be used to take advantage of the downside protection offered by quality stocks would be interesting,” said Ms Schmidt.
The other major finding of the report was that the overall level of quality of stocks held by mutual funds has increased over time.
“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,” she said.
