Macro views

Quality investing: Durable returns and downside defense

June 15, 2026 - 5 min

In a market where investors often debate growth versus value, quality investing can be overlooked, yet it remains a foundational approach to identifying durable companies. Businesses with strong balance sheets, stable earnings, and consistent cash flow have historically demonstrated the ability to participate in market upside while offering a degree of resilience during periods of stress.

In this article, Gateway Investment Advisers outlines why quality investing remains a foundational approach to identifying durable companies.

Key takeaways

Quality companies are defined by strong fundamentals, including stable earnings, high returns on capital, consistent cash flow, and lower leverage.
Over time, quality investing has demonstrated competitive risk-adjusted returns relative to broad market and factor-based benchmarks.
A focus on quality can help investors navigate volatility by balancing market participation with potential downside resilience.

What is quality factor investing?

Factor investing, including quality investing, is a well-established tool for diversification. However, many investors often focus on just two dominating categories: growth and value. There is continuous debate as to which is better over the long-term, yet there is one factor that gets less attention than it may deserve – quality.

Gateway has found that quality is a hallmark characteristic of durable companies with resilient business models, reflecting historical profitability and strong fundamentals with the potential to outgrow the average company over time. Specifically, quality companies tend to demonstrate stable earnings, have high return on equity and assets, consistently generate high levels of cash flow, and maintain low leverage. These stocks often offer broad market participation with potential for defense.

Think of quality investing as choosing the well-engineered highway over the scenic but treacherous mountain road. It may not offer the same adrenaline rush, but it can get you to your destination – reliably, safely, and often faster than you might expect.

Why quality investing stands out in volatile markets

Quality is timeless and stands out in a disposable world.

A focus on quality investing can help investors weather diverse market environments – providing the potential to benefit from rising markets while offering potential protection during market stress.

The long-term case for quality remains remarkably robust. Quality, as demonstrated by the S&P 500^® Quality Index (the Index), has shown the ability to provide a standout risk and return profile relative to the broad market and other factors. The Index is designed to track high-quality stocks within the S&P 500^® Index; the selections are based on quality score. The Index’s quality score for individual stocks is calculated using return on equity, accruals ratio, and financial leverage ratio. While the past cannot predict the future, the quality factor has provided robust performance and risk-adjusted returns relative to the broad S&P 500^® Index, as well as standing strong amongst other popular factor-based investment approaches over time.

Why quality matters in uncertain markets

Global markets have experienced significant changes, leading to persistent uncertainty on many fronts. In such an environment, it is increasingly important to take a holistic view of business health, rather than focusing exclusively on valuation or yield; focusing on durable businesses, with fortress-like balance sheets that can withstand full economic cycles, can add a meaningful layer of protection through times of uncertainty.

For example, consider the period after the Tech Bubble in early 2000 to 2002 or during the Great Financial Crisis from 2007 to 2009. During these periods, as shown below, high-quality companies often performed better, providing a source of defense relative to the broad S&P 500^® Index and ranking well among other factors.

How quality scores are built and measured

Gateway’s investment team found that investors can harness the benefits of healthy firms and balance long-term growth with defense through an emphasis on quality equities. With an expertise in quantitatively driven equity portfolio management, the investment team identified key metrics that indicate strong, quality companies. The team then developed a distinct and disciplined investment process aiming to increase a portfolio’s overall Quality Score, which is driven by a focus on key fundamental variables.

A critical element of the process is breadth. Omitting entire industries or overly large index holdings in pursuit of quality can lead to unintended portfolio risks and missed opportunities. A more robust approach aims for broad exposure while seeking quality leaders within each industry – ensuring broad portfolio diversification and potential market participation. This quantitative approach is efficient and avoids more time-consuming fundamental research.

The process results in a highly-diversified portfolio emphasizing firms with established track records of profitability and strong fundamentals – companies that are highly levered with poor balance sheets are eliminated. With discretion, the team enhances the Quality Score of the equity portfolio by identifying opportunities to maximize profitablity metrics and minimize leverage metrics. For Gateway’s Quality Income strategy, this results in an equity portfolio emphasizing the highest quality names from the S&P 500^® Index and relative overweightings to historically high-quality sectors.

Combining quality equities with options for income

As the factor debate continues between the cyclicality of factors, investors may want to consider a time-tested alternative – quality investing. The potential durability offered by the quality factor is increasingly important for investors as volatility persists. The resilience of high-quality companies has shown the potential to outgrow average, or low-quality companies over time. A focus on quality may offer broad market participation and a source of defense during market turmoil.

Founded in 1977, Gateway was one of the first to adopt options and offer them to risk-conscious, tax-aware investors. Pairing a quality equity portfolio with an index-option based strategy can generate consistent monthly income powered by implied volatility levels. This dual approach seeks both long-term growth and income, giving investors broad equity market exposure with cash flow from options.

Past performance does not guarantee future results.

Gateway does not provide tax advice. Tax treatment and rates can and do vary over time. Investment decisions should be made based on an investor's objectives and circumstances and in consultation with his or her investment and/or tax advisors. Data sources: Bloomberg, L.P., Multpl.com, ShillerData.com, and Morningstar Direct^SM. For more information and access to additional insights from Gateway Investment Advisers, LLC, please visit www.gia.com/insights.

Natixis Advisors, LLC provides advisory services through its division Natixis Investment Managers Solutions. Advisory services are generally provided with the assistance of model portfolio providers, some of which are affiliates of Natixis Investment Managers, LLC. Natixis Advisors, LLC does not provide tax or legal advice. Please consult with a tax or legal professional prior to making any investment decision

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

Indexes are not investments, do not incur fees and expenses and are not professionally managed. It is not possible to invest directly in an index.

Investors should fully understand the risks associated with any investment prior to investing.

Diversification does not guarantee a profit or protect against a loss.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers or any of its affiliates. The views and opinions expressed may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

The S&P 500^® is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

Bloomberg is defined as a market leader in business media and financial information services that provides real-time financial data, analytics, and news to professionals and the public.

Morningstar Direct is a professional-grade investment research platform developed by Morningstar, a global provider of independent investment research and data.

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