Different investing styles shine in different markets... here's why some investors are looking more closely at quality companies today.
In partnership with Schroders:
Ever noticed how a team can win the premiership one year, then struggle to make the finals the next?
The players didn't suddenly forget how to play. The competition caught up, conditions changed and momentum shifted.
Investing works in a similar way.
Different types of investments tend to perform well at different stages of the market cycle. That's why buying whatever's been on a winning streak lately isn't always the smartest move.
If there were one investing style that outperformed in every market, investing would be pretty straightforward.
Instead, different styles have tended to perform better under different conditions.
Growth companies have often done well when interest rates are low and the economy is expanding.
Value companies have generally performed better during economic recoveries or periods of higher inflation.
Quality companies, on the other hand, have historically been more resilient during periods of market uncertainty or volatility, like the environment global markets are navigating today.
Understanding these differences won't predict the future, but it can give you a better sense of the market.
A quality company isn't always the fastest-growing or the most talked about. More often, it's a business that's consistently getting the fundamentals right.
That usually means a company that:
✅ generates consistent profits
✅ doesn't rely heavily on debt
✅ sells products or services people continue to buy
✅ reinvests its earnings to support future growth
These businesses are often better placed to navigate both strong economic conditions and more challenging ones.
When one investing style performs well for several years, it's easy to assume that trend will continue.
Psychologists call this recency bias - our tendency to place more importance on recent events than longer-term patterns.
In investing, that can lead people to buy into an investment after much of the growth has already happened, while overlooking areas of the market that have fallen out of favour.
Quality investing hasn't had an easy run lately.
According to Schroders' analysis of MSCI data, quality stocks have underperformed the broader international developed market (MSCI EAFE) by 19% over the past three years, making it one of the weakest periods for the style in decades.
The same analysis shows the difference in valuations between quality companies and the broader market has narrowed to levels that have rarely been seen over the past 40 years.
What does that mean for investors?
Historically, when valuation gaps reached similarly low levels, quality stocks went on to outperform value stocks by an average of 7.7% over the following year and 5.5% per year over the following three years.
Past performance doesn't guarantee future returns, but it highlights how parts of the market that get overlooked can sometimes become the next areas of opportunity.
One example of this style is Schroders' CORE strategy that has been combining quality and value investing for nearly 25 years.
It screens more than 15,000 companies using a quantitative process to identify financially strong businesses trading at attractive valuations…. instead of simply following whatever part of the market is getting the most attention.
For investors who like the idea of taking emotion out of investing, it's an approach that's built around discipline rather than headlines. But like any equity strategy, it carries risk - capital gains and returns aren't guaranteed.
Markets will always have favourites, but CORE is designed to look beyond today's headlines and focus on businesses with the potential to deliver over the long term.
This article was produced in partnership with Schroders. Before making any investment decision, you should consider seeking independent professional advice and read the relevant Product Disclosure Statement at schroders.com.au.
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Schroders Disclaimer
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders).
This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group.
The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document.
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