Why quality funds have struggled – and what it means for your portfolio

At a time when investors seem increasingly focused on rapid growth, quality investing has fallen out of the spotlight.

Dependable companies with strong balance sheets and steady earnings used to appeal to investors. But this ‘quality’ part of the stock market hasn’t been in favour recently and that’s impacted the performance of many funds that use a quality, or quality growth, investment approach.

This article isn’t personal advice. If you're unsure whether an investment is right for you, seek financial advice. All investments can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to future returns.

Quality vs value investing

In recent years, quality investing has lagged value investing, and this trend has intensified in 2025.

Globally, outside the US, there has been a rotation – in Europe, its quality market is 23 percentage points behind value so far this year, while in emerging markets the gap is over 15 points and in the UK it’s 13.

In the UK and Europe more cyclical, or economically sensitive, sectors, like banks and aerospace & defence, have been among the standout performers.

These sectors typically benefit when the economic outlook looks stronger, and this year they’ve been supported by rising geopolitical tensions and calls for increased defence spending. They don’t tend to feature heavily in quality-focused funds, so those that favour high-quality businesses have captured less of this upswing.

In Asia and emerging markets, high-growth technology companies, particularly those linked to artificial intelligence (AI), have attracted the most attention. Quality-focused funds might invest in some established technology businesses, but they’re more likely to avoid the most speculative or fast-moving areas. As a result, they haven’t kept pace with the strongest parts of these markets either.

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. But when investors are more optimistic about economic conditions, defensive sectors can fall behind.

Why these investing trends matter

When a particular investment style goes out of favour, it can feel uncomfortable for investors who hold funds using that approach. But it’s important to remember this is normal in long-term investing. Value, growth, quality and momentum all take their turn leading the market.

Quality investing focuses on companies with durable business models, strong finances and management teams capable of navigating uncertainty. These traits don’t always shine when investors are upbeat and perhaps chasing more cyclical or speculative themes. But historically, quality companies have tended to hold up better during tougher periods or provided more stability over the long run.

Some fund managers believe the current environment has created opportunities. In a recent discussion with a Japanese manager, they highlighted two areas they believe are attractive.

First, companies harnessing AI not just for headline-grabbing growth, but to improve productivity and efficiency across their operations. Second, businesses producing essential goods, like household items or hygiene products, where customer demand is more likely to stay steady through economic ups and downs.

But companies stuck somewhere between the two, neither leveraging new technologies nor providing everyday essentials, may find it harder to keep pace.

What this means for Wealth Shortlist funds

Several Wealth Shortlist funds have been affected by this shift in market leadership. Most notably, Liontrust UK Growth and CT European Select, both of which focus on high-quality, financially robust businesses with long-term competitive advantages, have faced headwinds as value or AI-driven areas have dominated.

The Liontrust fund has had an additional challenge. It invests a meaningful amount in higher-risk small and medium-sized UK companies. This part of the UK market has also been out of favour, which means the fund has faced two simultaneous style headwinds.

While uncomfortable in the short term, styles don’t stay out of favour forever, and this could provide long-term opportunities if sentiment towards the UK and smaller companies improves.

Some other quality growth funds on the Wealth Shortlist have experienced similar pressures. This includes FSSA Asia Focus, Troy Trojan Global Income, Troy Trojan Income and Barings Europe Select. While each of these funds have had their own specific challenges, this doesn’t mean the investment approach is broken because investors reward different company characteristics at different times.

Staying diversified matters most

No one can reliably predict when, or if, market leadership will change. Value outside the US could continue to perform strongly, or investors may remain focused on high-growth narratives centred on AI. But over full market cycles, companies with reliable earnings, strong finances and competitive advantages have often proved resilient.

For most investors, staying well-diversified across regions, sectors and styles is the most effective approach. This helps reduce the risk of being too heavily exposed to any one theme and improves the chances of benefiting when the market cycle turns again.

Periods of underperformance can be challenging, but they can also create opportunity for patient, long-term investors. Staying focused on goals, rather than short-term market noise, remains a key part of building and maintaining a resilient investment portfolio.