The recent shift in the economic landscape has ushered in significant ramifications for the global marketplace, particularly impacting domestic small-cap stocks. The broadening of tariffs to encompass all US trading partners has heightened fears of a global trade war while increasing the level of uncertainty felt by consumers and businesses alike.
We believe it is increasingly crucial for investors to focus on the quality of their investments.
Amid this turbulent and unpredictable macroeconomic environment, we believe it is increasingly crucial for investors to focus on the quality of their investments. We believe high-quality companies, often characterized by resilient business models and healthy financial profiles, are uniquely positioned to weather economic storms without compromising their long-term growth potential.
Quality 101
Definitions vary throughout the industry, but common characteristics used to identify quality may include low leverage, low earnings volatility, and stable return profiles. However, on their own, quantitative factors have the potential to paint a limited picture of the true resilience of a company.
We believe quality is better assessed using a more comprehensive approach that considers critical elements such as shifting industry dynamics, customer and supplier relationships, and a management team’s strategy and ability to execute, amongst other things. This framework helps identify companies we believe are best positioned to endure downturns while capitalizing on expansionary periods, providing sustainable growth through economic cycles
Potential protection to the downside
During periods of elevated market volatility, capital preservation typically moves up investors’ priority lists. While virtually every company is exposed to macroeconomic forces like inflation, tariffs, weak consumer spending, and muted business investment, some quality companies are inherently better positioned to face these challenges (Chart 1).
Chart 1. Quality vs. General market indices during market downside since 1990
The power of compounding
Downturns often reveal the true strength of high-quality companies, but the decisions made throughout the business cycle lay the foundation for long-term success. These companies tend to build competitive moats, maintain pricing power, attract best-in-class workforces, and invest strategically when others are unable. Over time, these advantages compound, driving high-return investments that lead to strong through-cycle performance. (Chart 2).
Chart 2. Cumulative outperformance of quality over time
Final thoughts
We believe the foundation of a successful small-cap strategy lies in identifying and investing in high-quality companies with strong, sustainable business models. Achieving this requires a disciplined approach rooted in rigorous, first-hand fundamental research, supported by a global network of investors and proprietary analytical tools. This deep due diligence often yields differentiated insights, which we believe are best expressed through focused, high-conviction portfolios of high-quality companies. Over time, this process may deliver potentially compelling long-term returns while offering meaningful downside protection during periods of market stress.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies.
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