Portfolio manager Tilo Wannow looks ahead following a difficult year for quality stocks. Despite recent headwinds, he sees new opportunities and catch-up potential for select quality stocks.
The past two years have been challenging for long-term quality investors whose approach centres on identifying robust companies with stable business models, high returns on capital and reliable cash flows that deliver stability and solid performance over long periods of time. However, in recent years we have faced a market environment that has been unfavourable for quality companies, with quality stocks underperforming the broader market.
Markets were largely driven by a handful of very large companies, while many traditional quality sectors, such as healthcare and consumer stocks, went through an unusually weak phase. At the same time, sectors such as banking and defence, which we significantly underweight in our portfolio due to our investment approach, among other things, contributed significantly to stock market gains in Europe. In this interplay of market concentration, sector trends and style factors, the performance of many quality companies has recently lagged behind highly concentrated stock indices. A particularly strong driver was the development in the technology sector. While large-cap names in AI infrastructure – such as semiconductors, data centres and cloud computing – performed strongly, software and IT service providers lagged behind.
Since August 2025, we have tactically adopted a somewhat more cautious overall equity positioning. Several reasons prompted us to reduce our equity exposure: US equity valuations have continued to climb following the rally after the April 2025 tariff shock, making the risk/reward ratio less compelling from a valuation perspective. Ambitious growth expectations appear largely priced in, particularly for AI-driven equities. The US labour market shows early signs of cooling, but we do not anticipate a recession. In our view, the risk of a correction still exists. Accordingly, we remain invested in companies with fundamentally sound business models and promising long-term growth prospects – while ready to capitalize on more favourable entry points should a correction occur. Another headwind for us as a European asset manager in 2025 was the pronounced weakening of the US dollar versus the euro. Despite the currency risk from a European perspective, however, now is not the time to turn away from US companies. We are currently in a technology era led by the US. Moreover, a weaker US dollar particularly benefits multinational US companies, enhancing their competitiveness abroad and boosting currency gains on international revenues – partially offsetting currency losses through higher corporate profits, depending on the business model. Currency effects are therefore visible in the short term, but in the medium to long term they are secondary to the corporate quality we seek for our clients.
A confident outlook
Looking ahead after a challenging year for quality stocks gives reason for optimism. Historically, quality companies have delivered above-average risk-adjusted returns, with drawdowns during crises and major corrections typically being less pronounced than those of other investment approaches and the broader market. Following the recent period of relative weakness of quality companies, we are increasingly finding quality companies with high profitability, solid cash flows and reliable earnings growth at a reasonable price. Patience, perseverance and a consistent focus on substance pay off – we are more convinced of this today than ever before.
