Quality-at-a-Reasonable-Price Investing in a High-Volatility Market: Lessons from The London Company's Large Cap Portfolio in 3Q2025

In the third quarter of 2025, The London Company's Large Cap Portfolio delivered a 6.3% gross return, outperforming the Russell 1000 Value index's 5.3% gain despite its Quality and Low Volatility factor exposures being out of favor, according to a QTD Large Cap – 3Q2025 vs. R1000V analysis. This performance underscores a critical insight for investors: disciplined stock selection and strategic sector positioning can offset the drag of unfavorable macroeconomic conditions. As AI-driven markets continue to oscillate between speculative euphoria and correctionary selloffs, the portfolio's approach offers a blueprint for navigating volatility while adhering to value principles.

Strategic Stock Selection: Magnificent 7 and Beyond

The portfolio's outperformance was anchored by its exposure to the Magnificent 7, a group of high-growth tech stocks that have dominated market sentiment. Alphabet Inc. (GOOG) and Apple Inc. (AAPL) were standout contributors, driven by robust core business results and AI-driven innovation, according to the QTD Large Cap – 3Q2025 vs. R1000V analysis.

Equally critical was the portfolio's ability to identify undervalued performers in AI-related sectors. TE Connectivity Ltd. (TEL), for example, outperformed expectations by delivering stronger margins amid mixed demand, benefiting from infrastructure spending tied to AI adoption, as noted in the QTD Large Cap – 3Q2025 vs. R1000V analysis. These selections highlight the importance of marrying growth narratives with fundamental rigor-a hallmark of Quality-at-a-Reasonable-Price (QARP) investing.

Sector allocation further amplified returns. An overweight in the Materials sector, which benefited from AI-driven industrial demand, and an underweight in the lagging Real Estate sector, which faced liquidity constraints, were pivotal, as described in the QTD Large Cap – 3Q2025 vs. R1000V analysis. However, the portfolio's underweight in Utilities and Health Care-sectors that outperformed due to their defensive characteristics-reveals the trade-offs inherent in active management, as noted in the QTD Large Cap – 3Q2025 vs. R1000V analysis.

Factor Resilience: Quality and Low Volatility in Turbulent Times

While the portfolio's Quality and Low Volatility exposures were unfavored in 3Q2025, historical data suggests these factors can provide asymmetric protection during market stress. According to a MSCI report, the Low Volatility factor has historically outperformed broader markets during six major bear-market periods from 1988 to 2023, as noted in the Low Volatility over the Market Cycle: Understanding Factor .... Similarly, high-quality stocks-defined by metrics like profitability and low leverage-tend to outperform when the VIX (volatility index) exceeds 20, with the performance gap widening exponentially, as noted in the Why Market Stress Favors Quality: The Macroeconomic ....

This resilience is particularly relevant in AI-driven markets, where speculative excess often inflates valuations. Portfolio managers like Matt Smith of QSM Asset Management argue that disciplined, fundamentals-oriented strategies remain essential for achieving risk-adjusted returns in such environments, according to a Value investing in the age of AI analysis. The London Company's decision to exit underperforming positions like Bruker Corporation (BRKR)-due to weak capital returns and pharma spending concerns-and initiate a high-conviction stake in Equitable Holdings, Inc. (EQH), exemplifies this approach, as detailed in the QTD Large Cap – 3Q2025 vs. R1000V analysis.

Long-Term Viability: Balancing Speculation and Fundamentals

The current market environment, characterized by a "buy the dip" mentality, presents both opportunities and risks for value investors. Retail investors increasingly view short-term declines in AI and tech stocks as buying opportunities, a trend reinforced by the sector's rapid rebounds, according to a The Unyielding Bull: Investors See Dips as Discounts, Fueling Market Resilience analysis. However, this behavior risks decoupling asset prices from intrinsic value, particularly in speculative corners of the market.

For QARP investors, the key lies in identifying undervalued businesses with durable competitive advantages. Companies like NVIDIA and Microsoft, which combine strong fundamentals with AI-driven growth, offer compelling long-term prospects, as noted in the The Unyielding Bull: Investors See Dips as Discounts, Fueling Market Resilience analysis. Conversely, weaker firms-those lacking clear revenue streams or profitability-remain vulnerable to sustained declines, as noted in the The Unyielding Bull: Investors See Dips as Discounts, Fueling Market Resilience analysis. Defensive sectors like healthcare and utilities, though less impacted by AI-driven momentum, provide stability in volatile environments, as noted in the The Unyielding Bull: Investors See Dips as Discounts, Fueling Market Resilience analysis.

Conclusion: A Framework for Navigating the AI Era

The London Company's 3Q2025 performance demonstrates that Quality-at-a-Reasonable-Price investing can thrive in high-volatility markets when paired with strategic stock selection and sector agility. While Quality and Low Volatility factors may face headwinds during speculative booms, their historical resilience during downturns makes them valuable tools for risk management.

As AI-driven markets continue to evolve, investors must balance optimism about technological progress with caution regarding overvaluation. By prioritizing fundamentals, diversifying across sectors, and maintaining a disciplined approach to capital allocation, QARP strategies can navigate the turbulence of the AI era while capturing long-term value.