Is quality investing broken, or have investors simply paid too much for it? This article explores why Thornburg believes quality and valuation discipline are inseparable, and why flexibility remains essential to long-term investing.
What constitutes a quality company has become one of the defining debates in global equity markets. The recent struggles of several well-known quality managers have led some investors to question whether quality investing itself is facing structural headwinds. We believe the more important question is not whether quality investing still works, but how it is defined and implemented.
At Thornburg, quality has always been at the heart of our investment process. But we have never believed that owning exceptional businesses alone is enough. The price paid for those businesses ultimately determines the returns investors can expect. For us, quality and valuation discipline are inseparable.
Quality Requires Valuation Discipline
Exceptional businesses have the ability to compound shareholder value over many years. Durable competitive advantages, disciplined capital allocation, resilient cash flows and strong management teams remain characteristics we continue to value highly. But not at any price.
Even exceptional businesses can become poor investments if purchased at excessive valuations.
When investors become willing to pay almost any price for perceived quality, future returns become increasingly dependent on continued multiple expansion rather than the underlying growth of the business. Eventually, valuations reconnect with fundamentals.
We believe that many of the challenges experienced by quality investors in recent years have had less to do with quality investing itself and more to do with paying increasingly demanding valuations for a relatively narrow group of companies.
That is why each of our investments begins with two questions: Is this an exceptional business? And does today’s valuation provide sufficient compensation for the risks we are taking?
Quality identifies great businesses. Valuation determines whether they become great investments.
Quality Can Be Found Anywhere
Our definition of quality is deliberately broad.
We seek businesses that occupy essential positions within the global economy, demonstrate durable competitive advantages, execute consistently, and allocate capital responsibly. We do not believe those characteristics are confined to a particular sector, geography, or investment style.
Quality is not limited to a small number of data points, and it is not confined to a handful of sectors or industries. It can emerge anywhere. It can be found in banks with improving capital allocation, telecommunications businesses with resilient cash flows, industrial companies benefiting from long-term structural demand, or semiconductor manufacturers supplying critical technologies.
This philosophy is supported by our global generalist research platform. Rather than organising analysts into sector silos, investment ideas compete across industries, regions and market capitalisations. We believe this broader perspective helps uncover opportunities that more specialised research structures may overlook.
The result is a portfolio driven by business fundamentals rather than benchmark composition or style definitions.
Following Opportunity, Not Fashion
Thornburg Global Opportunities Fund’s investment philosophy has remained remarkably consistent for decades. While markets change, our principles do not.
When software and other quality-growth businesses traded at increasingly demanding valuations, we were prepared to look elsewhere. As attractive opportunities emerged in sectors such as banks, telecommunications and semiconductors, we followed the valuation opportunity rather than the prevailing market narrative.
We continue to seek exceptional businesses capable of creating long-term shareholder value. What changes as markets evolve is where those opportunities can be found and the price that different opportunities command.
We balance staying true to our investment principles with continuous review of what has worked and where we can improve. Over time, we have strengthened our focus on financial resilience, recognising that highly leveraged companies can appear attractive during favourable conditions but become significantly more vulnerable when circumstances change. We have also become increasingly patient, preferring to wait for attractive entry points in outstanding businesses rather than compromising on quality to deploy capital at optically low valuations. At the portfolio level, we have broadened diversification across industries and geographies while paying greater attention to stock correlations and common risk factors to ensure that the portfolio benefits from genuinely differentiated sources of return.
Our investment in Orange S.A. illustrates why quality is about more than simply owning expensive growth companies. As one of Europe’s leading telecommunications companies, Orange benefits from resilient demand, extensive infrastructure that would be extremely difficult to replicate, and significant pricing power within many of its markets — characteristics we believe support durable cash flows over time.
Importantly, however, the investment case was strengthened by valuation. At the time of investment, the market largely viewed telecommunications as a low-growth sector, allowing us to purchase a high-quality business at a significant discount to many perceived “quality” companies. We believed the market was underestimating both the resilience of the business and its long-term earnings potential. This discussion illustrates our investment approach and reflects our analysis at the time of investment. Each investment is different, and the experience described should not be viewed as representative of all portfolio holdings or outcomes.
Quality Investing Still Works
We do not believe that quality investing is broken.
In our view successful investing still begins with identifying exceptional businesses capable of creating value over many years. But quality alone is not enough.
Successful investing also requires the discipline to recognise when great businesses become too expensive, the flexibility to seek opportunities beyond the market’s favourites and the patience to wait for attractive entry points.
Our investment philosophy has remained consistent for more than four decades: seek exceptional businesses, maintain valuation discipline and invest wherever the best long-term opportunities can be found.
While markets change, those principles do not.
To learn more about the Global Opportunities Fund, visit Thornburg Global Opportunities Fund (UCITS) | TBGOPPI ID
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