Time in the market is better than timing the market, the adage goes. To see “quality stocks” outperform over time, investors need to be patient. Quality stocks are defined as shares of companies with a high return on equity, stable profits and low debt. They are known among investors for outperforming broader markets over the long term, as shown in Figure 1.
Figure 1: Stock market performance (December 31, 1998 – September 30, 2025). Over the long term, quality stocks have significantly outperformed the broader stock market.
Source: CCLA, Bloomberg, MSCI (returns net of withholding tax, in local currency). The above data is not on an annual basis. Past performance is not a reliable indicator of future returns. The value of investments can go down as well as up.
Clients often ask us, “How did my portfolio perform this quarter?” or “What do you expect the markets to do next quarter?” They’re right to ask that question, but individual quarters aren’t always the most useful way to measure long-term success.
For example, in 2025, quarterly returns fluctuated, showing how unpredictable short-term results can be. When U.S. President Donald Trump took office in January, he introduced business-friendly tax cuts and deregulated key industries, measures that typically create market tailwinds.
However, during the first quarter, the MSCI World Index fell by 3.6%. In April, President Trump announced tariffs that many estimated were negative for the U.S. economy. But the index rose 9.5% in the second quarter. And between July 1 and October 1 this year, the index rose another 7%, despite more fees.
Now some “star” investors claim they can time the stock market. But most evidence shows that attempts to time the market usually end with poor returns. Looking at the data, systematic stock market patterns have mainly played out over the longer term. And over that longer term, quality stocks have historically outperformed other types of stocks.
Payout takes time
Following any investment style, including quality, usually means that a manager combines periods of outperformance with periods of underperformance.
Figure 2 and Table 3 below show the MSCI World Index (currently 1,320 companies from 23 countries) with its smaller sub-indexes the MSCI World Quality Index (300 companies of the highest quality from those same countries) and the MSCI World Growth Index (603 companies with the highest growth) over the periods indicated.
Figure 2: Quarterly, annual, five-year and 10-year returns of the MSCI World Quality Index, compared to the MSCI World Index (December 31, 2008-September 30, 2025). The longer the time frame, the better quality has outperformed the MSCI World Index.
Source: MSCI, CCLA. The above data is not on an annual basis. Past performance is not a reliable indicator of future returns. The value of investments can go down as well as up.
The data for Figure 2 above is shown in Table 3 below.
Column 1 of that table shows the performance, in absolute terms, of the MSCI World Quality Index, which is composed of companies with high equity returns, stable annualized earnings growth and low debt levels, for the quarters ending on the dates indicated. For example, banking giant JPMorgan is not included in the MSCI World Quality Index because, like many banks, it has high debt.
Column 2 shows the relative performance of the MSCI World Quality Index versus the MSCI World Index. Column 3 shows the relative performance of the MSCI World Quality Index versus the MSCI World Growth Index. The MSCI Growth Index includes stocks with high growth rates in revenue, earnings per share and retained earnings. This includes, for example, Nvidia and Microsoft, but not Facebook parent company Meta, because Meta’s growth is relatively low.
Columns 4 through 6 of Table 3 show the same absolute and relative performance, but for the one-year period ending on the date shown. Columns 7 through 12 show the same data for a five-year time frame and a 10-year time frame, respectively.
Table 3: Performance on a quarterly, annual, five- and ten-year basis (2008-2025). The longer the time frame, the better quality stocks have outperformed the broader stock market and growth stocks.
The left side of Table 3 is a patchwork of red and green, as quality stocks underperform and outperform in a pattern that is difficult to predict from quarter to quarter. In contrast, the right side is mostly green, showing that quality stocks have outperformed the broader market over the longer time horizon.
The bottom row of column 11 in Table 3 above shows that the MSCI World Quality Index has outperformed the broader MSCI World Index over all ten-year periods since 1998. That’s a remarkably consistent performance. Figure 4 shows this performance in a line chart.
Figure 4: Historical outperformance of the MSCI World Quality Index versus the MSCI World Index (December 31, 1998 – September 30, 2025). Over longer periods of time, quality stocks have consistently outperformed the broader stock market.
Source: CCLA, MSCI. Past performance is not a reliable indicator of future results. The value of investments can go down as well as up.
Quality over growth
Quality stocks have also outperformed (currently popular) growth stocks the longer you hold them, in 85% of quarters over a ten-year period. Only rare, structural crises have disrupted this regularity. For example, quality stocks underperformed growth stocks for six quarters in 2021-2022, as investors piled into growth stocks like Peloton and Zoom during the Covid pandemic and lockdown.
In the quarters where the ten-year performance of quality stocks lagged behind growth stocks, quality stocks delivered absolute ten-year returns between 178% and 335%, which is hardly a big deal in performance terms.
The bottom row of column 3 in Table 3 is particularly interesting. The 49% (circled) shows that growth stocks outperformed quality stocks slightly more often on a quarterly basis. Nevertheless, when using the same returns over a longer term, such as five years or ten years, quality outperformed growth 69% of the time (column 9) or 85% of the time (column 12), respectively.
In the long run
Why this paradox between marginal underperformance in the short term and substantial outperformance in the long term?
During market crises over the past 25 years, quality stock prices have typically fallen less than the broader market or growth stock prices. For example, during the global financial crisis, Quality Index prices fell by a third, from peak to trough, and recovered in just over three years. In contrast, growth stock prices fell by more than 40% and took more than five years to recover, as shown in Figure 5 below.
Figure 5: MSCI indices during and after the global financial crisis (2007-2009). Quality stock prices fell less and recovered faster than other share classes.
Source: CCLA, MSCI. The above data is not on an annual basis. Past performance is not a reliable indicator of future returns. The value of investments can go down as well as up.
Furthermore, quality stocks have had what some academics call “sustained returns.” When they outperformed, they did so for longer periods, further exacerbating their positive returns.
Finally, quality stocks and growth stocks have different income characteristics. For example, as of September 30, 2025, the MSCI World Quality Index’s dividend yield of 1.25% was almost double that of the MSCI World Growth Index (0.69%). This difference in dividend yield means that for growth stocks, price growth is the dominant source of investment returns. In contrast, the performance of quality stocks depends on both price growth and dividends. In other words, investing in quality stocks offers a more diversified return than investing in growth stocks.
The investment manager’s perspective
As active portfolio managers with a quality bias, we do not simply follow a quality benchmark. Instead, we focus on why these quality companies have their specific characteristics. This includes measuring their competitive advantage and how their growth prospects are developing. At the same time, we want to avoid quality companies that are so expensive that they risk hurting investor returns in the long term if valuations were to decline.
It is rarely easy for an investment manager to stick to a long-term strategy at a time when short-term results favor other approaches. We never stop refining our approach, but stay true to the core principles that have proven to work.
Our customer relationship managers play an important role in this. They are essential in helping clients understand the difference between short-term and long-term dynamics in the stock market. Fortunately, many of our clients have a long-term perspective that is well served by investing in quality stocks.
A decade in the making
Different investors have different investment horizons, which may require different strategies. If history is any guide, patience is the price to pay for quality to outperform in the long run. It is crucial that investors have a realistic view of their time horizon when deciding whether to invest in quality stocks.
*Thanks to Michael Ekaette, CFA and Max Burl.
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