Darius McDermott, Managing Director at FundCalibre explore how after a prolonged period out of favour, quality investing may be showing signs of recovery, but investors should avoid assuming a simple return to past winners.
It has been a fallow period for quality-focused managers. Traditional quality sectors, such as healthcare, consumer and software, have been out of favour, and while quality managers have had some exposure to the top-performing technology giants, it has generally not been in enough quantity to revive their fortunes.
The weakness of quality has been a feature across most markets. In 2025, the MSCI World Quality index rose 16.9% vs 21.6% for MSCI World*.
In the US, that could readily be attributed to the strength of the technology companies, but a similar phenomenon was seen in the UK, with the MSCI UK Quality up 19.6% in 2025 and the broader MSCI UK index up 35.1%*, and across other markets.
This makes quality funds a potentially interesting area of focus. This factor has been a source of long-term outperformance and it could be a moment to pick it up at a low point.
There are encouraging signs from some of the sectors that are a natural hunting ground for quality managers, such as consumer or healthcare companies.
Equally, the rout in software stocks may have created some mispricing that quality managers can exploit.
For example, after a long period of weakness, the healthcare sector started to revive in June as investors started to catch up with an improved regulatory and pricing landscape.
The MSCI World Healthcare index outpaced MSCI World by 5.7% over the month*. In the longer-term, healthcare remains a beneficiary of favourable demographics, and also of AI adoption, which promises to revolutionise some parts of medicines, such as diagnostics.
It is also possible that the consumer sector starts to revive. It should be a natural beneficiary of lower pump prices as oil starts to flow through the Strait of Hormuz.
US consumers should also receive a boost as tax cuts from the Big Beautiful Bill start to feed through into household budgets. Even the unloved software sector is starting to attract some interest.
Robert Lancastle, manager of the JOHCM Global Opportunities fund, says they have started to “sow seeds” in the software sector, believing that the sell-off has been overdone.
However, it is dangerous to assume that quality will simply revert to the mean. The picture is more complicated. There are signs of a revival in consumer spending in the US, but it has an increasingly K-shaped feel to it, with the top tier of consumers in a good position to spend, but the bottom tier still squeezed.
The healthcare sector remains vulnerable to capricious policymaking in the US, and patent cliffs. The delicate relationship between software companies and AI is not yet clear.
It is also worth noting that this is not a natural environment for quality. The quality factor tends to do well during recessions, and at times of significant market stress, when investors gravitate to the safety of resilient earnings and strong balance sheets. Neither of these factors are on the cards.
Against this backdrop, Lancastle cautions about looking too narrowly for ‘quality’: “We search the market for quality, but we don’t start with the view that we just look at history to tell us where future quality is going to reside.
We’re more broad-minded than that. We tend to find quality in a broader set of sectors and countries than many other pure quality managers.”
This flexibility may help managers tap into a broader range of growth themes. Neil Robson, manager of the CT Global Extended Alpha fund, says:
“Post the Global Financial Crisis earnings growth in the US (fuelled largely by the technology sector) outstripped the rest of the world. In the years since the pandemic however, the gap has narrowed significantly. We anticipate that pockets of earnings growth in Europe and Japan will keep pace with the US, and a broader range of sectors look capable of delivering appreciation. Defence and financials are two notable examples.”
Robson says they are diversifying into areas of the market that were previously out of favour but are once again beginning to generate meaningful earnings growth. “For example, we see select opportunities in areas like life insurance.”
Lancastle is participating in both the growth of defence spending and the revival in energy spending and finds plenty of quality companies in both sectors.
The fund holds names such as engineering Emerson, Woodside Energy, and Baker Hughes. Lancastle says, “the long-term need for energy security, particularly in Asia, has gone up significantly.”
Taking this broader approach to quality may help investors manage some of the swings associated with style leadership in recent years. David Lewis, manager of the Jupiter Merlin Income Portfolio, says:
“It is incredibly difficult to know when styles are going to come in and out of favour. The first thing we do is try to be diversified all the time. We always have a broad portfolio, with exposure to growth, value, and quality-oriented managers. Some of them won’t be working all the time, but you’ll have something that will be working all the time.”
He also believes investors need to look at individual markets to judge the best approach. He adds: “In Japan, the reason we have dedicated exposure is because of the huge reform agenda. You don’t get this exposure in the large caps, which are more global in nature.”
The environment is moving more towards quality stocks, and some of the headwinds that have weakened the quality factor over the past few years have eased.
However, it is still worth looking at fund managers with a broad approach to quality investing, rather than assuming traditional quality sectors will simply revert to the mean.
*Source: index factsheet, 30 June 2026
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
Main image: quality, towfiqu-barbhuiya-0ZUoBtLw3y4-unsplash
