Quality is dead. Long live quality.

Extreme concentration in AI-related stocks, rather than a failure of quality investing, explains the recent underperformance of diversified quality portfolios.

• From July 2017 to June 2025, quality stocks outperformed their benchmarks about half the time in the US and two-thirds of the time internationally; since July 2025, these rates fell to 22% and 15%, while emerging markets declined from 64% to 43%.
• More than half of total market outperformance came from information technology, and the sector’s top 10 names contributed nearly 80% of its excess performance, including Micron, AMD, Nvidia and SK Hynix.
• Only three of 11 sectors outperformed in both US and international markets, the lowest international reading in 10 years; the cap-weighted S&P 500 beat its equal-weight version by 32% over three years at the end of 2025, above the 31% peak reached in early 2000.
• Between July 2017 and June 2025, a random portfolio of non-AI quality stocks had more than an 80% chance of beating the US market, with typical excess returns of about 6% annually in the US and 13% internationally; from July 2025 to August 2026, those odds fell to 25% and 13%, with negative typical excess returns.
• Adding a 20% allocation to AI stocks raised the probability of beating the market above 90% in both regions and restored typical excess returns to about 20% in the US and 15% internationally.

Takeaway: The team still treats quality, growth and diversification as its risk-management tripod, keeping AI exposure near 20% and at least 60% in Defenders and Leaders; it expects market breadth eventually to normalize but acknowledges that AI could warrant a larger allocation if its future becomes more predictable.