Quality Investing: Why Fundamentals May Regain Their Place in Equity Portfolios

Is quality investing set for a comeback? As markets shift and fundamentals regain focus, we explore why resilience and predictability may lead equity strategies again.

Devan Kaloo Global Head of Equities

As markets chase shiny objects in the fast lane, fundamentals may be quietly reclaiming the driver's seat.

Since the post-COVID recovery commenced, the quality investment style has been out of favor in equity markets. Investors gravitated towards value stocks and the cyclical recovery story – drawn by expectations of a rebound in economic growth.

This shift has posed challenges for active managers whose philosophy centers on investing in high-quality companies. However, as market conditions evolve, there are compelling reasons to believe that quality’s time may be coming again. 

Understanding quality as an investment style

Quality investing focuses on companies with robust fundamentals: resilient earnings, strong balance sheets, and prudent management. These businesses are typically better equipped to weather economic downturns and deliver sustainable returns over time.  

Historically, quality strategies have offered investors fewer tail risks – the possibility of rare but extreme events that can cause significant losses, a greater margin of safety, as well as less-volatile earnings streams.  

Over the long term, quality strategies have delivered better outcomes than the broader market, offering a more predictable experience for investors (Chart 1). 
 

Chart 1. Quality investing works

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Source: LSEG Datastream, August 2025
 

Notably, quality represents the largest addressable segment of the global equity market, accounting for approximately 42% of the $2.9 trillion cross-border and UK active equity universe. 

Recent headwinds 

Growth and value’s dominance 

In recent years quality as an investment style has faced significant headwinds. This environment has been particularly challenging for quality-focused portfolios investing outside of the US – where value has dominated. In contrast, when you include US assets, growth overall has done better. (Chart 2).  
 

Chart 2. MSCI World - Growth outperforming Value

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Source: Morningstar, 31 August 2025
 

In the US, growth stocks (in the form of a handful of tech titans) helped push US equity markets to successive records as investors embrace the narrative around the transformational benefits of artificial intelligence. These US companies now dominate the US market as well as global equity indices.  

Elsewhere, value stocks, often perceived as cheap, have outperformed, driven by hopes of a cyclical recovery. That’s certainly been the case in the past six months (Chart 3). While there is some merit to this narrative, markets may be getting ahead of themselves. 
 

Chart 3. MSCI World ex-USA - Value triumphant

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Morningstar, 31 August 2025
 

The challenges are structural as well as cyclical. The rise of passive mutual funds and exchange-traded funds has reshaped investor behavior; fee compression and the disruptive force of technology have altered the competitive landscape.  

These dynamics have created headwinds for quality-focused strategies, but they also serve as catalysts for innovation and adaptation. 

Why quality may be poised for a comeback 

We believe there are early indications that the tide may be turning. We see three factors which suggest that a rotation from value to quality could be on the horizon: 

• Economic headwinds and growth concerns. Global economies face multiple challenges, from slowing US growth to the impact of tariffs and geopolitical uncertainty. As these risks become more tangible, investors are likely to become more selective – favoring companies with predictable earnings and strong fundamentals. This environment should create a more favorable backdrop for quality to deliver better performance.
• Interest rates. Expectations of falling interest rates are another potential source of support. As rates decline, the relative appeal of stable, high-quality companies increases. Historically, periods of declining rates have seen a rotation from value to quality. The market consensus now points to interest rates falling this year and in 2026 – generally beneficial for equities and quality alike.
• Broader technology leadership. While much of the recent market rally has been concentrated on a handful of US technology giants, there are signs that tech optimism is broadening. Chinese tech stocks are now as likely to rise as their US counterparts, and the benefits of investment in AI and data centers are spreading through global supply chains. This broadening of equity leadership could benefit quality-focused portfolios, particularly those with a global reach.

Fundamentals in focus

As the market outlook becomes more nuanced – with significant divergences in valuations amid slowing economic growth – company fundamentals are likely to come to the fore. We believe this environment should favor stock pickers and those focused on quality. 

In a world where change is the only constant, the enduring virtues of quality – resilience, predictability, and sustainable growth – are likely to regain their appeal. 

Investor sentiment is improving, with risk appetite rising, especially towards emerging markets (EM). EM equity allocations have been at their highest since early 2025, and there is renewed interest in regional (ex-US) equity strategies as well as smaller companies.

Final thoughts

In an environment defined by uncertainty and constant lane changes, quality investing offers a disciplined approach that keeps its hands firmly on the wheel. As investors seek to balance risk and return, fundamentals may once again take the lead – proving that in the long run, it's not about speed, but control.

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Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

MSCI AC World Index 

Index considered representative of stock markets of developed and emerging markets. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.

MSCI AC World Index Quality

The index aims to capture the performance of quality growth stocks

by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over year earnings growth and low financial leverage

MSCI World Growth Index

Unmanaged index considered representative of growth stocks of developed countries. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.

MSCI World Value Index

Captures large and mid cap securities exhibiting overall value style characteristics across 23 Developed Markets (DM) countries. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.

MSCI World Ex USA Growth

Captures large and mid cap securities exhibiting overall growth style characteristics across Developed Markets (DM) countries--excluding the United States. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend.

MSCI World EX USA Quality

The index aims to capture the performance of quality growth stocks by identifying stocks with high quality scores based on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage.

MSCI World Ex USA Value Index

The index captures large and mid cap securities exhibiting overall value style characteristics across Developed Markets countries. The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield.
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