Is value investing out of style?

Value investors are finding it difficult to keep up with the rise of passive indices and the tech boom, but does this imply that value investing is no longer relevant?

For value investors, this is a challenging time.

According to the theory, value stocks that are trading at a lower price than others in relation to their fundamentals should eventually beat the market as a whole.

That's not how things are going. The MSCI World Value Index produced an annualized return of 11.0 percent for the ten years ending July 31, 2026, while the MSCI World Index produced an annualized return of 13.3 percent. With a bias toward value stocks, the former index is based on the latter.

During that period, momentum has been a more important investing factor. Over the past ten years, the MSCI World Momentum Index has performed better than the main index, with an annualized return of 15.2%.

Watch the entire video here: Veteran value investor Terry Smith, CEO and chief investment officer of investment management firm Fundsmith, acknowledged the emergence of momentum investing in July 2026 when he informed shareholders of Fundsmith Equity Fund that he would begin considering the momentum factor more when choosing investments.

"Valuation-driven investors may find periods of market exuberance especially challenging," stated Cedric Jacque, investment manager at wealth management firm Lloyd Capital. "Today's artificial intelligence (AI) investment boom, robust momentum, and high valuations bear striking similarities to past late-cycle markets."

Why is value investing having trouble?

Although they are connected, value investing has lagged behind alternative strategies in recent years for two main reasons.

The emergence of passive investing is the first. The percentage of passive funds in the overall investment fund market increased from 12.4% in January 2008 to 46.4% in July 2026, according to data from investment research firm Morningstar.

The majority of passive funds are market-cap weighted, which means that the biggest companies make up the majority of the fund. As a result, when investors purchase index funds, they are investing the majority of their money in the index's largest companies. Put another way, as passive investing grows in popularity, more capital flows into the largest corporations in the world, driving up their share prices independent of changes in their fundamentals. In fact, a lot of their purchasers are probably just purchasing an index fund without considering their fundamentals.

The emergence of passive funds has coincided with a period in which the value of technology stocks has skyrocketed. A large portion of the market's growth has been concentrated in tech stocks due to innovations like cloud computing, the widespread use of smartphones, and, more recently, the AI boom.

Because tech tends to focus much more on the future than the past or present, it is a challenging industry for value investors. Palantir Technologies, a software company, was trading at more than 150 times its trailing earnings and 112 times its projected earnings as of August 21. The corresponding numbers for Tesla are approximately 336 and 185, respectively. Value-focused investors are effectively barred from the tech sector due to investors' pricing in expectations of rapid future growth.

In his shareholder letter, Terry Smith emphasized the convergence of these two phenomena, blaming "a market which is dominated by so-called passive or index funds and the boom surrounding AI which have combined to produce a market dominated by momentum rather than any fundamental factors like profitability, returns on capital and growth" for the underperformance of his funds.

Is value investing still effective?

Smith noted the need to "take more account of momentum in our investment decisions" but hasn't completely given up on value investing.

However, this change has drawn criticism, with some contending that the current climate makes it crucial to follow value investing principles.

"We concur with Smith that a market that is driven by momentum and passive flows can become more distorted, that momentum is at levels last seen in 1999, and that this will end badly," Lloyd Capitals Jacque stated. "The solution is where we split up.

"We feel that abandoning tried-and-true investment principles and becoming more of a crowd follower is not a solution we can support," Jacque went on. "We still think that the best way to compound capital over time is through disciplined, bottom-up value investing with an emphasis on earning power."

According to Jacque, the boom in passive investments presents an opportunity rather than a threat to patient, value-driven investors.

According to him, "passive investing and index flows should increasingly expand the pool and the magnitude of the mispricing and therefore lead investment opportunities for the patient long-term shareholders." "That has us ecstatic."