IN A WORLD that demands instant gratification, the idea of waiting for the right stock at the right price might feel counter-intuitive. But seasoned investors know this: when the going gets tough, quality gets going. Whether it’s a bar of chocolate, a smartphone, or a financial product, compromise on quality seldom ends well. That logic holds firm even in equity investing.
Across business cycles, companies that consistently deliver on profitability, maintain strong balance sheets, and invest in long-term capabilities tend to stand out. These companies don’t just ride market waves, they build their own tides. That’s the crux of the quality investing theme.
Defining ‘Quality’ company
The quality theme filters companies through multiple parameters: business fundamentals, financial health, and consistency. Typically, these firms have the following attributes:
♦ Sustainable competitive advantages or economic moats
♦ Stable profits across cycles
♦ Sensible capital allocation policies
♦ High Return on Equity (ROE) and Return on Capital Employed (ROCE)
♦ Low or manageable debt (sometimes even net cash positions)
Add to that strong brand equity, high reinvestment potential, and cost efficiencies, and you’re looking at companies that prioritise long-term reliability over short-term hype.
But quality alone isn’t enough. As ace investor Warren Buffett famously noted, it’s better to buy a wonderful company at a fair price than a fair company at a wonderful price. Valuation discipline is integral to quality investing.
The case for quality in today’s market
Amid challenges, the case for quality is regaining strength.
The Nifty 200 Quality 30 TRI, a benchmark tracking high-quality companies, delivered a resilient 5 per cent return in FY25, even as momentum (-8 per cent) and alpha (-3 per cent) strategies turned negative in a volatile year. This came on the heels of a strong 35% gain in FY24, highlighting quality’s ability to deliver in both upcycles and uncertain markets. While it trailed some other styles during periods of excess, that phase of underperformance has now set the stage for more attractive entry points.
A historical comparison reveals an important pattern: quality outperforms in bear and sideways markets, while it slightly lags in sharp bull runs. For instance, during the COVID-led drawdown from June 2019 to March 2020 when market slid by 34 per cent, the quality index fell 24 per cent, while alpha and value strategies saw deeper cuts of 29 per cent and 46 per cent respectively.
Even more compelling is the risk-adjusted return (R.A.R) profile. Over a 5-year daily rolling basis, the quality theme had the highest RAR (3.3) among popular investment styles, indicating more consistent returns with lower volatility. It also had zero instances of negative 5-year returns, highlighting its predictability.
Where to find Quality
Contrary to popular belief, quality companies aren’t limited to large-cap FMCG or IT giants. High RoE stocks span across sectors. Market capitalisation is no constraint either, as several mid and small-cap names fit the quality mold.
This breadth is what gives the quality theme its structural appeal. Instead of being confined to a single sector or size bucket, it draws from a diverse pool: cutting across industries and market caps. In that sense, quality isn’t a niche. It’s a lens through which long-term potential can be identified across the market.
Lessons from the past for the future
For the patient investor, the reward from quality investing is visible in long-term compounding. Rs1 lakh invested in the Nifty 200 Quality 30 TRI in April 2005 would have grown to Rs26.8 lakh by March 2025, translating to a CAGR of 17.9 per cent, compared to 14.3 per cent for the broader Nifty 200 TRI. That’s not just outperformance, it’s wealth creation through discipline.
As India potentially moves into a new phase of moderate growth and sectoral churn, chasing what worked last year may no longer bear fruits. It’s about preparing for what might survive the next few.
Against this backdrop, investors seeking to integrate the Quality theme into their portfolios may explore ICICI Prudential Mutual Fund’s latest offering―the ICICI Prudential Quality Fund, an open-ended equity scheme focused on the Quality factor. In a climate of economic uncertainty and moderating growth, companies with robust financials and steady profitability are more likely to perform well. This fund aims to harness that potential by investing in high-quality companies available at reasonable valuations. (NFO) is open from May 6 to May 20.
The writer is managing director, Future First Financials Private Limited.