IN DAILY LIFE, whether it’s the food we eat, the brand of clothes we buy, the school we choose for our children, or the airline we fly with, we instinctively gravitate towards what we believe is the best or the one which is giving us high-quality service/product. This preference stems from one simple factor―trust. Surprisingly, in investing, many get swayed by short-term fads, excessive focus on low valuations, or speculative opportunities, often ignoring the long-term rewards of owning high-quality businesses.
The style of investing, i.e. quality investment theme, focuses on companies that consistently exhibit strong fundamentals, sound governance, and durable business models. These are businesses with a proven track record of high return on equity (ROE) and return on capital employed (ROCE), minimal debt, stable and growing cash flows, and effective capital allocation. But quality isn’t just about the numbers. It includes qualitative factors like customer loyalty, brand strength, innovation, and sustainable competitive advantages―or what investors commonly refer to as “moats.”
We’ve seen global brands falter because of product recalls, safety issues, or ethical lapses. Incidents such as smartphone battery explosions, safety software failures in aviation, or contamination in food products have not only led to financial losses but also damaged reputations that took decades to build.
On the other hand, quality companies usually benefit from customer stickiness, pricing power, and long-term brand equity. They are more likely to deliver steady earnings, even during times of economic stress. When inflation rises, input costs surge, or credit conditions tighten, quality businesses with robust balance sheets and efficient operations are often better positioned to weather the storm. Rather than just surviving, they tend to emerge stronger, gaining market share as weaker competitors falter.
With global uncertainty driven by geopolitical tensions, high public debt, and slower economic growth, and domestic corporate earnings moving towards normalisation after a sharp post-Covid recovery, investors are increasingly looking for stability. Quality companies offer precisely that―consistency, resilience, and lower volatility.
Importantly, quality is not confined to any one sector or size. While consumer staples and IT services often dominate quality discussions, companies in sectors like private banking, pharmaceuticals, cement, and retail can also display high-quality characteristics. Likewise, both large-cap blue chips and niche small-cap firms can qualify, provided they show sustained profitability, prudent management, and strong financial discipline.
Interestingly, because quality stocks have underperformed styles like value and momentum in recent years, several fundamentally strong businesses are now available at attractive prices. For patient, long-term investors, this opens a window of opportunity to enter high-quality names at reasonable valuations.
Quality investing doesn’t mean buying at any price. Even the best companies can become poor investments if purchased at unjustifiably high valuations. The ideal strategy combines quality with price discipline: investing in great companies when they are fairly or undervalued. This approach not only limits downside risk but also improves long-term return potential.
Fund managers typically combine both top-down and bottom-up methods when building quality-focused portfolios. They assess macro trends to identify promising sectors and then zero in on individual companies by evaluating their balance sheets, earnings visibility, capital efficiency, and management strength. Rigorous filters are applied to ensure that only the best candidates make it into the portfolio.
In a world of increasing complexity and uncertainty, a portfolio of high-quality businesses provides not just growth potential but also peace of mind. For investors seeking sustainable wealth creation with fewer unpleasant surprises along the way, the quality theme remains a powerful and enduring choice.
In line with this, investors may consider ICICI Prudential Mutual Fund’s new offering―the ICICI Prudential Quality Fund, an open-ended equity scheme based on the Quality factor theme. It aims to tap long-term growth by investing in companies with strong fundamentals.
The writer is Certified Financial Planner and Founder, Unnathi Wealth