Quality’s rough ride

Quality growth has been unusually penalised by narrow, technology-led markets, but its depressed valuations and resilience could make it a powerful source of future returns.

• In 2025, quality underperformed the wider MSCI EAFE Index by almost 15%, while growth also recorded one of its worst relative performances in 30 years; the MSCI ACWI’s effective number of stocks fell close to 100, almost half the previous low before the dotcom bubble.
• Among stocks that at least doubled over five years, the highest-quality quintile has never contributed so few winners, while the lowest-quality group supplied almost 40%; a return to normal would more than quadruple the top international quintile’s share of winners.
• Businesses growing into quality can turn modest revenue growth into much faster earnings growth as margins and returns expand: Spotify still grows revenue by about 12% annually, while Nu Holdings serves more than 130 million customers and 60% of Brazilian adults.
• Established compounders show quality through profitable growth and cash generation: Ferrari compounded revenue by about 10% annually over the past decade, expanded operating margins from 20% to 30%, and returned almost 700% since its 2016 spin-off versus just over 240% for the global index.
• Emerging quality businesses can improve structurally in cyclical industries: Disco has 80% of the global market for key semiconductor polishing and grinding machines, while CRH targets revenue growth of up to 10% annually and has lifted its operating margin from 5% to 14% over the past decade.

Takeaway: Investors should treat quality growth as a core allocation rather than a fashionable factor, favouring companies with strong economics, disciplined management, high returns and the ability to compound through cycles, while recognising that the recovery in quality winners remains uncertain.