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Effective Scoring to Capture Quality and Value in China How might different factor scoring methods affect quality and value in the China A market?
BY Priscilla Luk

In the S&P China A Quality and Value Indices, various financial ratios are combined to form the respective factor scores. In this paper, we evaluate two methods used to normalize and combine the financial ratios—z-scores and SNDZ-scores —on how they resulted in different portfolio characteristics for quality and value in the China A market from 2006 through 2019.


• Equal-weighted quality and value subfactor z-scores resulted in unbalanced subfactor portfolio tilts and biased subfactor contribution to final scores.

• When applying the equal-weighted z-scores approach, the quality portfolio was dominated by the accruals factor in its portfolio tilts and factor score contribution.

• The quality portfolio based on the subfactor SNDZ-scores had more balanced and consistent tilts to various quality subfactors and a reduced number of stocks with low return-on-equity (ROE) and high leverage (LEV) ratios.

• The SNDZ-score approach resulted in more all-around high-quality stocks that scored well across various quality measures.

• Quality portfolios based on two different scoring methods had similar performances over the long-term history, with opposite performance cyclicality behavior.

• The quality portfolio based on z-scores had procyclical performance characteristics while the one based on SNDZ-scores behaved defensively.

• When using SNDZ-scores, the quality portfolio had higher sector bias in defensive sectors, including Health Care and Consumer Staples.

• The quality portfolio based on SNDZ-scores had higher active exposures to profitability and low LEV. ROE attributed most to the active return and risk among all style factors.

• Portfolio characteristic differences in value portfolios based on two different scoring methods are negligible.

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