Bruno Paulson, managing director of Morgan Stanley Investment Management's International Equity team, said investing in well-managed companies with high returns on operating capital can outperform traditional equity indices over time.

"We're well-known advocates for a long-term approach to high quality investing," Mr Paulson said.

He highlighted the power of compound interest, noting that returns can grow dramatically over extended periods. An investment receiving 9% compound interest would double every eight years, significantly outpacing simple interest returns.

The Morgan Stanley team aims for companies in their global portfolios to compound at around 10% annually. Mr Paulson broke this down as:

• 5-6% reliable revenue growth across economic cycles
• 1% from incremental margin improvements 
• 4% free cash flow yield

However, Mr Paulson expressed concern about the broader market's ability to match this compounding in challenging economic conditions.

"That is the worry right now, that after 15 years without a recession, barring the brief interregnum of COVID, trickier times may be on the way," he said.

Mr Paulson noted the shift in market focus from 2023's "Magnificent Seven" US stocks to what some are calling the "Fabulous Four" in 2024. He singled out Nvidia as the "Omnivorous One", with its stock price up 150% in the first half of 2024 and a market capitalisation of US$3.09 trillion.

Despite the challenging investment environment, Mr Paulson emphasized the importance of thinking long-term and avoiding permanent capital destruction.

"We want to avoid the permanent destruction of capital, which we would argue is just as important to investors as the chance to earn outsized investment returns," he said.

The Morgan Stanley team maintains that long-term investors benefit from investing in high-quality equities that can withstand market fluctuations over time.