Why ‘Quality companies’ are well suited to building portfolios of income paying structured products.

Any building is perhaps only as durable as its foundations. In just that same way, any company is only as good as its fundamental attributes. Investing in ‘quality’, means seeking out companies that has strong fundamental qualities, and likely to stand firm in any financial storm.

The ARIA Target Income Fund believes that a High-Quality investing strategy is the cornerstone of an equity portfolio.

The ARIA Target Income Fund focuses on four key characteristics in the companies chosen for its portfolio:
1. Reliable Outperformance: Quality companies should demonstrate consistent outperformance over the long term, based on known and proven investment principles.

2. Resilience Across Business Cycles: The chosen companies should exhibit resilient behaviour across various market conditions, remaining stable during economic ups and downs.

3. Standing Firm in Market Crises: Quality companies should act as a defense mechanism during times of crisis, protecting the portfolio from severe downturns.

4. Asymmetric Risk Profile: High quality companies tend to exhibit asymmetric risk profiles’, meaning that they offer more of the upside potential, than they do downside.

Highly profitable companies often fit the criteria for great core holdings, as they tend to possess all of the four characteristics mentioned above. The ARIA Target Income Fund believes that a High-Quality investing strategy is the cornerstone of an equity portfolio. It provides the key to generating attractive income payment streams from the structured products it invests into, meaning a resilient portfolio that brings a predictability about regular and attractive income streams, whilst demonstrating the ability to withstand market turbulence.

Historical data reveals that quality outperforms the US equity market in [88%] of ten-year periods, indicating its reliability over time.

Reliable Outperformance with the Quality Approach:
The idea of selecting companies based on their quality attributes has a long track record among practitioners. Warren Buffet, along with his mentor Benjamin Graham, recognised the value of high-quality companies early on. Recent academic research also confirms the long-term outperformance of quality stocks. The chart below shows how a High-Quality portfolio, consisting of the top 30% stocks with the highest operating profitability, has outperformed a Low-Quality portfolio by over 5% annually since 1995. It has also outperformed the market by 3% annually, with lower volatility. Quality stocks historically offer higher returns and lower volatility, making them attractive investments to generate income paying structured products from.

CHART 1: High Quality Outperforming Lower Quality Businesses

High Quality Portfolio vs Low Quality Portfolio returns

Steady as Quality Goes:

Quality stocks benefit from strong business models and consistent financial performance. Their predictable results lead to steady, robust returns across various market scenarios. When compared to other equity approaches, the Quality factor (or quality approach), demonstrates more consistent periods of outperformance. Historical data reveals that quality outperforms the US equity market in [66%] of ten-year periods, indicating its reliability over time.

CHART 2: History shows quality consistently outperformance

Index performance by decade
High Quality Index S&P 500 Index
95 to 05 436% 264%
05 to 15 225% 170%
15 to Present 192% 200%

Weathering Uncertainty and Market Drawdowns: Investors seeking strategic equity investments should focus on strategies capable of weathering unexpected events. Core holdings need to withstand market drawdowns without frequent trading. While quality is not the most defensive approach available, (a distinction held by the Minimum Volatility’ approach), it has consistently protected portfolios during market downturns, whilst still providing the means to generate higher income payouts. (More defensive, lower volatility approaches may have less downside volatility but would result in a lower quarterly income payments as a result). In the 15 worst months in US equities over the last 60 years, the Quality factor cushioned the drop and reduced drawdowns. For example, during the Covid Crisis in 2020, the Quality factor reduced the drawdown by 2.5%. Quality provides essential respite during market turmoil, making it an ideal candidate for long-term investments.

CHART 3: Quality stocks reduced drawdowns during COVID

Max drawdown during 2020 crisis
High Quality Index S&P 500 Index
Drawdown % -30.5% -33.0%

Drawdown during 2020 crisis
When buying structured products, that have downside protection mechanisms, having a strategy that targets companies with historically defensive performance during downturns can significantly improve the probabilities of the those downside barriers never being breached, whilst maintaining attractive income generation.

The All-Weather Factor: A successful investment strategy aims to capture more of the upside than the downside. Asymmetric profiles thrive in the long run. The Quality approach exhibits such a profile, with an upside capture ratio of [115]% and a downside capture ratio of only [93]%. This means it captures more of the market's upside during positive periods while minimizing losses during market downturns.

CHART 4: Capturing most of the upside, whilst limiting the downside

High Quality Portfolio - Sensitivity to market gains or losses
No. of years Average %tage of Gains/Loss captured
S&P 500 Up year 21 115%
S&P 500 Down year 7 930%


In conclusion, investments in quality companies meet the criteria of reliable outperformance, resilience, defensiveness, and an asymmetric risk profile. They provide an ideal strategy to generate attractive coupons for structured products, yet historically have shown the resilience to remain within the protection buffers offered by structured products. Backed by academic research, quality strategies possess the strength to grow over the long term, continue to support strong income generation and weather temporary storms.


For more information and answers to any questions you may have, please contact us.

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