At the moment, the stock market’s giving ‘quality’ shares the cold shoulder. This means many fund managers deploying this quality investment strategy have been underperforming.
Is quality investing finished? Or can it still make investors wealthier?
What is it?
For those wondering, this style focuses on high-quality businesses with high returns on capital, reliable cash flows, and strong balance sheets. As such, they’re often very established businesses.
Indeed, well-known quality investor Terry Smith even makes a point to note the average year of foundation for the companies in his Fundsmith portfolio. It’s currently 1919, meaning they’re collectively over a century old!
While there’s some crossover, these investing styles can broadly be separated into the following four camps.
| Style | Key traits | Risks/downsides |
|---|---|---|
| Quality | High profitability, low debt, market leaders | Often steadier growth |
| Growth | Strong revenue growth, innovation-driven | Sometimes loss-making, often highly valued |
| Value | Low valuation metrics, often pay dividends | Potential value trap (cheap for good reason) |
| Momentum | Riding market trends, sentiment-driven | Can reverse quickly, high volatility |
Out of favour
In 2025, there was a notable rotation out of many quality shares. According to Hargreaves Lansdown, Europe’s quality market was 23 percentage points behind value in 2025, as of December. The gap in emerging markets was over 15 points and 13 in the UK.
There’s been a sudden revival in cheap UK value and cyclical stocks. Meanwhile, defence stocks such as BAE Systems have surged due to geopolitical shocks.
In the US, some AI-related growth stocks have exploded higher, most noticeably Palantir and Nvidia. These aren’t typical shares a quality fund manager would buy because they either don’t produce reliable cash flows or they’re very highly valued.
Terry Smith and Nick Train (another quality-focused investor) have both underperformed their respective benchmarks for five consecutive years.
Sectors commonly viewed as ‘defensive’, including healthcare, consumer staples, and telecoms, have still grown in value but lagged. These areas often form the backbone of quality-focused funds because they’re expected to offer steady demand and reliable earnings.
Hargreaves Lansdown.
The advantage of flexibility
When fund managers pivot away from a particular philosophy, it’s called ‘style drift’. This is generally viewed negatively, as opposed to ‘sticking to their guns’.
This is one advantage retail investors like myself have — not being bound by a strict investment mandate. I’m free to invest wherever, whether that’s quality, cheap value/dividend, or disruptive growth stocks. Or investment trusts and exchange-traded funds (ETFs).
To give a flavour, here are four very different investments that outperformed for my portfolio in 2025:
| Return* | Type | |
|---|---|---|
| Aviva | +54% | Value/dividend stock |
| Games Workshop | +47% | Quality/growth stock |
| Nu Holdings | +62% | Growth stock |
| BlackRock World Mining Trust | +74% | Investment trust |
This shows how staying diversified across themes/sectors/styles can produce strong returns.
FTSE 250 trust
Having said all that, I think quality investing style can still make investors wealthier. The market’s cyclical and investing styles come in and out of fashion.
On this basis, Train’s Finsbury Growth & Income Trust (LSE:FGT) might be worth a look.
This FTSE 250 trust holds many quality UK shares that are currently unloved, including London Stock Exchange Group, Rightmove, Auto Trader, RELX, and Diageo.
These falling stars have held performance back. But they’re the sort of shares that could bounce back sharply if and when sentiment changes and there’s a rotation back into quality from value.
That said, many are data firms that are facing theoretical disruption threats from AI, so this adds an element of risk. The again, there’s a strong possibility that AI makes some software/platform businesses stronger due to their hard-to-replicate datasets.
Finsbury’s not one I’m going to buy, as I’m currently looking at other FTSE 250 investment trusts. But if quality comes back into fashion, this trust could recover strongly.
