23rd July 2026
Why good-quality companies aren’t always the best investments
Most fund managers will tell you they want to buy high-quality companies. After all, who wants to invest in a poorly run business with dismal prospects and a shrinking market share?
Even ‘special situation’ fund managers like us want to buy good-quality companies. But quality comes at a price and, for periods of time, the comfort of quality can be overvalued. That’s why we aim to invest in companies that have temporarily fallen out of favour but have the potential to recover.
Quality is easily recognisable and measurable, using metrics such as a high return on equity (RoE) or a high return on invested capital (ROIC). This has led to it becoming a prized factor for many investors. But we don’t believe that quality, in and of itself, tells the whole story.
This distinction matters. A high-quality company can be a poor investment if expectations are too high, while a temporarily unloved company can become a strong investment if expectations are too low. Our job is not simply to identify quality, but to judge when the market is mispricing it.
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