In a game of stick or twist, Darius McDermott, Managing Director of FundCalibre says that the numbers tell us there is one long-term winner – in quality.
Investment managers tend to have a guiding philosophy, which governs the type of companies they pick. They may like solid, dependable companies that can compound invested capital over time.
Or they may like unloved companies, where there is the opportunity for a turnaround. Each approach may have periods in and out of favour.
The market values different characteristics at different points in the economic cycle. For example, when the market is nervous about the outlook, investors may gravitate towards high-quality companies that may be more resilient in a weak economic environment.
When investors are more optimistic, they may seek out high-growth companies.
Judging this is never easy, so for those who want to stick rather than twist, the numbers tell us there is one long-term winner – and that is quality. Over the past 30 years – the MSCI Quality index has produced an annualised return of 11.2%, compared with just 8.7% for the MSCI World*.
Over the past 20 years – the MSCI Quality (856%) has outperformed its growth (676%) and value (300%) counterparts**.
But the past five years – and particularly the past 18 months – have been unkind to quality as an investment style – AI has been the dominant force in markets in recent years, but the broadening out of markets in 2025 favoured the value names – with financials, natural resources and defence performing well.
We also have Donald Trump doing his best to remove certain economic moats – be it pressure on healthcare companies or swipe/fee limits on the likes of Mastercard or Visa – much of which adversely affects quality companies.
The surprise is that geopolitical uncertainty usually pre-empts a risk-off move – which typically favours quality – which we have not really seen on this occasion.
History shows us this is likely to be short-lived, with quality typically outperforming the MSCI World when the VIX is above 20 (below 20 generally correspond to more stable, less stressful periods in the markets)*.
The argument against this being an opportune time to get on the quality train is that the world has moved on from the post-GFC environment (where many of these companies performed so well) and that as a result these long-duration assets shouldn’t be valued as highly any more for two reasons: rising interest rates, meaning the opportunity cost of waiting longer for these earnings is higher; and that we are in a world of rapid technological change, which opens the door to greater disruption for these businesses.
Nutshell Growth manager Mark Ellis says his portfolio now looks attractive from a number of metrics, due to quality being oversold – this includes a free cashflow yield of 4.75% (125 basis points above the MSCI World), and a P/E ratio of 19.5x, which is a discount to the S&P 500.
He says he is finding opportunities across the likes of software – but he is also adding to names like Hermes, that traditionally would have sat outside the portfolio.
T. Rowe Price Global Focused Growth Equity portfolio specialist Daniel Hurley says they have started to look more closely at quality opportunities as they have begun to appear.
However, he adds they do not view the market simply on whether a company has a high ROE relative to cost of capital – adding that there is a qualitative element – citing the need for strong management and a focus on the sector and technological disruption.
He says the sell-off has been so extreme due to an amalgamation of factors and cites three sectors where they believe there are opportunities.
“Healthcare is under pressure because of the populist policies of Donald Trump – the likes of onshoring, drug pricing and insurance premiums coming down.
European luxury has had challenges as the consumer struggles with the cost of living. Meanwhile, China – where the consumer has been a big part of the luxury story – has had challenges with its economy since 2021.”
“The big one is software – and the real concern that AI could disrupt that space.
More broadly for quality that point of finding companies with high ROE relative to their cost of capital has changed because we are in a structurally higher interest rate environment – because that cost of capital is now continuing to increase.”
Research from JPMorgan shows now could be an ideal time to consider quality again. It notes that high-quality stocks are now priced at a discount, both to the broad market and relative to their long-term history.
Within US markets, the quality factor is more attractive than ever, except for during the dot-com bubble and the COVID-era dislocation. It adds that 2025 was the fourth most challenging year for quality since 1990 (only 2003, 2009 and 2020 were worse); all were followed by incredibly strong performance (something we have yet to really see in 2026).
With corporate earnings still expected to keep growing reasonably well across the globe – quality does look attractively priced on a long-term horizon.
However, risks over inflation, interest rates and energy prices remaining high; further geopolitical shocks and the impact of AI on valuations in certain sectors mean a select approach is necessary.
Other global funds which take the quality approach that investors may want to consider include CT Global Focus, managed by David Dudding, and the Mid Wynd International Investment Trust, which was taken over by Lazard fund managers in 2023 and invests in 40-50 stocks.
Regional strategies worth considering include AXA Framlington UK Mid Cap or the Montanaro European Income fund.
*Source: Scotia Wealth Management, 1 December 2025
**Source: FE Analytics, total returns in pounds sterling for MSCI Value, Growth and Quality, 9 April 1996 to 9 April 2026
***Source: JPMorgan, 13 February 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.
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