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June 2024
AAM Magazine
June 2024

Navigating Uncertain and Volatile Markets with ESG and the Quality Factor

  • Asia
  • Global

Market volatility, global political risks and economic uncertainty continue to shake global markets. In this environment, we think investors should re-evaluate their portfolio positioning to help  achieve both financial and sustainability objectives.

We answer some of the key questions facing investors looking to build resilient, alpha-generating and sustainable portfolios.

How is the current economic uncertainty impacting investors?

Over the next five years, we think investors will need to navigate increasingly complex economic, environmental, and political threats and opportunities to achieve their goals.

We are experiencing a new era of extreme volatility that is forcing investors to find new ways to achieve their portfolio objectives. In an environment marked by rapid market swings, investors looking to consistently outperform are reassessing their portfolios’ readiness for this new volatility paradigm.

How can investors manage risk in this environment?

With this heightened volatility, we think investors should pay more attention to financial measures that we believe define high-quality companies, such as profitability, cash flow and efficient balance sheet management. We believe these companies are positioned to potentially navigate challenging markets and outperform.

More specifically, what do high-quality companies look like?

Northern Trust Asset Management has developed a multi-dimensional view of quality companies, exhibiting characteristics such as:

Profitability: Our research shows that more profitable firms historically have delivered excess returns to shareholders, but no one measure of profitability is best. Examples of profitability include operating margin and return on invested capital.

Strong cash flow: Companies with strong cash flow produce sufficient cash to meet their debt obligations and day-to-day liquidity needs, while sustaining or growing dividends. We prefer companies that self-finance their capital needs, which is especially important when interest rates are high or companies are struggling to obtain loans.

Conservative balance sheets: We seek companies with executive teams that manage capital in a conservative manner. Our research and external studies (Titman, Wei, Xie 2004) show that overly aggressive executive teams can excessively deploy capital that fails to deliver positive return and cash flow to shareholders.

How does the quality factor perform during the various phases of the economic cycles?

Historically, quality has shown it can deliver excess returns during the economic contraction and ensuing recovery phases of the economic cycle while still showing positive excess return during the other two phases of economic expansions and slowdowns. For that reason, we think now is an opportune time for investors to lean into quality.



Entire Period





High Quality






Source: For illustrative purposes only. NTAM Quantitative Research, Bloomberg.  Entire period = December 31, 1978 – August 31, 2022.  Note: Russell 1000 index data is shown.  Factor returns are excess returns of the equal weighted top quintiles of MSCI Barra Factors over the Russell 1000 returns.  Geometric averages used for entire period.  For regime analysis, annual averages are displayed.  Past performance is no guarantee of future results.  Index performance returns do not reflect any management fees, transaction costs or expenses.  It is not possible to invest directly in any index.

While investing in quality, can investors also meet their economic, social and governance (ESG) objectives?

Quality may help investors meet their objectives as a single factor or in combination with other characteristics. We have found that strong ESG and financial management go hand-in-hand, as quality and ESG strategies both seek to provide excess returns by investing in companies with sustainable business models that are also managed for short- and long-term growth. ESG data also can help identify risks and opportunities not apparent in financial statements.

When combining quality with ESG, these high-quality companies must also demonstrate effective management of  ESG risks and opportunities. The added insight of ESG information can often identify risks not apparent in financial statements. When combined with the data from company financials, investors can gain broader insight into potential risks and opportunities.

By incorporating the quality factor into an ESG portfolio, investors can increase their portfolio’s focus on long-run sustainability  while increasing the potential likelihood of portfolio outperformance.

For Use with Institutional Investors and Financial Professionals Only. Not For Retail Use.

About Sustainable Investing

At Northern Trust Asset Management (“NTAM”), we define Sustainable Investing as encompassing all of NTAM’s investment strategies and accounts that utilize values based and norms based screens, best-in-class and ESG integration, or thematic investing that may focus on a specific ESG issue such as climate risk.  NTAM’s Sustainable Investing includes portfolios designed by NTAM as well as those portfolios managed to client-defined methodologies or screens. As the data, analytical models and aforementioned portfolio construction tools available in the marketplace have evolved over time, so too has NTAM. NTAM’s Sustainable Investing encompasses strategies and client assets managed in accordance with client specified responsible investing terms (historically referred to as Socially Responsible), as well as portfolios that leverage contemporary approaches and datasets, including ESG analytics and ESG thematic investing.

Environmental, Social and Governance (“ESG”) investing involves certain risks because the methodology of an underlying index selects and assigns weights to securities of issuers for nonfinancial reasons, a strategy may underperform the broader equity market or other strategies that do not utilize ESG criteria when selecting investments. The companies selected by an index provider as demonstrating ESG characteristics may not be the same companies selected by other index providers that use similar ESG screens. In addition, companies selected by an index provider may not exhibit positive or favorable ESG characteristics. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on a strategy’s ability to invest in accordance with its investment policies and/or achieve its investment objective. 

IMPORTANT INFORMATION. For Asia-Pacific markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information is subject to change based on market or other conditions.

Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index.

All securities investing and trading activities risk the loss of capital. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe Northern Trust’s efforts to monitor and manage risk but does not imply low risk.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

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