Is Quality poised for a comeback?

Is Quality poised for a comeback?

As an investment style, Quality has historically outperformed the World Index most of the time. 

In 2025 this has been an exception. Whilst Quality is delivering respectable performance, it is not keeping pace with the MSCI ACWI $ TR Index. The MSCI Quality Index is a factor‑based equity index designed to track companies with strong fundamental quality characteristics—typically firms that are profitable, financially sound, and exhibit stable earnings.
 

However, as can be seen in the chart above, Quality tends to underperform only for short periods. Indeed, since the beginning of the data in 1989, there was only one occurrence where Quality underperformed in successive years (from 2003 to 2006). That underperformance followed the deep and extended bear market of the dot-com bubble, with an extended junk rally recovering from a very low basis.

Whilst not remotely to the same extent, the stock market crash following Liberation Day on 2 April also created a low base for the rally we’ve seen in 2025.   This time, though, it has intially been a more tactical rally while the one following 2003 was structural following a recession.

The following chart reflects Quality’s performance data relative to the MSCI ACWI $ TR:

On a calendar year basis, Quality has outperformed in 17 years against 10 years of underperforming – a ratio of 1.7 to 1. Quality has delivered a total Alpha (outperformance) of +298% based on a cumulative return basis. On an annualised return basis, it has outperformed by +1.7% p.a.

Quality has strong merits as an investment style – it has outperformed materially over time, whilst at a lower risk of business failure (by holding quality businesses). 

Moreover, it is worth noting that Quality’s forward valuation versus the MSCI ACWI $ TR Index, as shown in the below chart, has collapsed since 2024 whilst its operational performance has continued. This is ascribed to the AI exuberance attracting funds away from non-AI related stocks.

Could Quality be poised for a comeback?

Past performance is not a guide to future returns. Opinions expressed here are as of the date of publication and subject to change without notice. It is not a recommendation to buy or sell any of the investments mentioned herein.

Issued and approved by Stonehage Fleming Investment Management Limited authorised and regulated by the UK Financial Conduct Authority (FRN. 194382).