KEY POINTS
- Value indexes may carry more mega-cap technology and AI exposure than investors expect.
- Rising growth-value overlap could weaken the diversification investors expect from holding both styles.
- Investors should review holdings, factor exposures and concentration to confirm that value allocations still meet portfolio goals.
For decades, investors have used growth and value allocations as a foundational block of equity portfolio construction. The distinction has been intuitive and practical. Investors expected growth to provide exposure to faster-growing companies, often with higher valuation multiples and greater sensitivity to earnings expectations. They expected value allocations to deliver a counterweight through lower multiple businesses, broader sector diversification, and more exposure to economically cyclical or defensive industries.
They owned both because they believed each would respond differently to changing market conditions.
Those assumptions merit a closer look today. Equity allocations that include a value tilt may be more exposed to AI investment cycles, cloud spending, hyperscaler capital expenditures and mega-cap technology earnings than investors believe. As growth and value become less distinct, investors should more closely question the risks they’re taking within their value allocations.
Large-Cap Value’s Changing Identity
Take the recent reconstitution of the Russell value and growth illustrates how value’s profile is evolving. Amazon is now the largest constituent in the Russell 1000 Value Index . Information technology exposure increased to 18.6% from 11.7% (Exhibit 1), while Magnificent Seven exposure rose to 16% from 6%. The index remains a legitimate value benchmark according to Russell's methodology, but it is increasingly influenced by forces that investors historically associated with growth.
EXHIBIT 1: VALUE'S MAKEOVER
Historically, interest rates, credit conditions, bank profitability, industrial activity, energy prices and broader economic cyclicality primarily influenced value stocks. Today, many companies in the value index are increasingly tied to AI capital spending, cloud growth, semiconductor demand, platform monetization, regulatory developments and earnings expectations for a small number of technology giants.
As a result, value is looking a lot more like growth. With the reconstitution, overlap within the Russell 1000 Value Index rose to roughly 34.5%, meaning about one-third of the value benchmark now sits in securities that also appear in growth. A 50/50 allocation to Russell 1000 Growth and Russell 1000 Value could therefore hold about 15% to 17% in the same companies. Further, correlation between the indexes has risen to nearly 0.3, from almost zero just a couple years ago.
A Challenge to What Value Means
With the striking evolution of the value profile, will value indexes still provide a strong proxy for value investing? The answer depends on what investors mean by “value.” If value is defined strictly according to Russell’s published methodology, then the Russell 1000 Value Index remains a valid and rules-based expression of that methodology.
However, if investors use the Russell 1000 Value Index as a proxy for other objectives — such as lower concentration, lower technology exposure, lower multiple risk, greater defensiveness, or stronger diversification versus growth — then the answer is more complicated (Exhibit 2).
Russell’s indices are not alone in the growth-value dilemma. S&P Dow Jones Indices is considering changes to its style methodology, including adding intangible assets and free cash flow as measures of value and removing price momentum as a measure of growth. The proposal reflects a longstanding concern that conventional metrics such as price-to-book can understate the economic value of internally developed intellectual property and research, which accounting rules generally treat as expenses rather than balance-sheet assets.
Great benchmark design does not eliminate the need for portfolio-level interpretation. A rules-based index can be methodologically sound while still evolving in ways that may reduce its usefulness for certain investor objectives.
EXHIBIT 2: WHAT INVESTORS THINK THEY OWN VS. WHAT THEY MAY ACTUALLY OWN
Playbook: Investigating the Portfolio Impact of Value
Growth and value remain useful categories, but they are not substitutes for bottom-up assessments of holdings, factor exposures, sector weights, valuation characteristics, macro sensitivities and concentration risk. For investors with dedicated growth and value allocations, several questions are worth asking:
- How much name-level overlap exists across the combined U.S. equity portfolio?
- Are the overlapping names concentrated among the largest contributors to active and absolute risk?
- Has the portfolio’s effective exposures to mega-cap technology increased, even if the stated allocation to value has not changed?
- Does the combined growth/value structure still provide the intended diversification benefit?
- Are the factor exposures such as value, quality, momentum, size, and low volatility aligned with the portfolio’s objectives?
- Is the value allocation intended to track a benchmark, diversify growth risk, reduce concentration, lower valuation exposure, provide potential downside resilience, or some combination of these goals?
The point is not to abandon value, but to stop assuming the label tells investors enough. As benchmarks evolve, portfolio construction has to evolve with them — starting with a clearer view of the risks embedded across growth and value allocations.
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