The Case for Quality Investing
- and why now could be an attractive entry point for long-term investors
Quality investing focuses on a rare set of exceptional companies distinguished by durable competitive advantages (“moats”), high profitability (strong ROIC and margins), and consistently stable, transparent earnings. These businesses tend to operate with low leverage, generate robust free cash flow, and compound value over long periods.
Both academic research and our own analysis show that owning high-quality companies has historically delivered superior absolute and risk-adjusted returns relative to the broader market. The “Quality Premium” is well-documented, persistent across sectors and regions, and particularly resilient during economic stress. In downturns, markets often exhibit a “flight to quality,” rewarding companies with dependable earnings and strong balance sheets.
Importantly, the Quality factor also exhibits low or even negative correlation with other factors such as Value and Momentum (the current 52-week correlation is -0.71). As a result, incorporating Quality into a multi-factor framework can meaningfully enhance diversification and improve portfolio risk-adjusted returns. This is a key pillar of our approach at Nutshell, where we allocate roughly 60% to Quality factors alongside Valuation, Growth, and Technicals - including Momentum.
Despite these advantages, markets have historically underpriced Quality characteristics, often due to investor preference for high-beta “story” stocks, benchmark-driven constraints, and behavioural biases favouring near-term excitement over long-term compounding.
Why Now?
Recently, Quality has significantly underperformed as investor attention centred on the AI revolution. This shift in sentiment has led to a compression of valuations for many high-quality but temporarily overlooked companies. Today, numerous Quality names in our portfolio are trading near their cheapest levels in a decade. During November, a deep review of our holdings revealed that 35% of the portfolio is currently in the lowest valuation percentile (based on P/E) of the past 10 years - a striking level of cheapness for businesses of this calibre. High-quality compounders available at decade-low multiples present, in our view, a compelling long-term entry point
Source: Bloomberg 19/11/2025
Looking Ahead
As we approach the end of 2025, uncertainty remains elevated, ranging from questions around the sustainability of AI-driven valuations to US political risk and the historically volatile period surrounding mid-term elections. Allocating to Quality, particularly within a diversified multi-factor framework, may offer investors a combination of resilience, factor diversification, and exposure to undervalued long-term compounders, at a discount to the market and their own historical valuations.
For these reasons, we believe this is a potentially attractive entry point to consider an allocation to the Nutshell Growth Fund.
By Mark Ellis, CEO Nutshell Asset Management
4th December 2025