Pzena: When a Value Index Stops Looking Like Value

The past several years have delivered extraordinary returns for U.S. large-cap indices, but the structure of those gains may be masking deeper shifts in how investors gain exposure to value.

As the team at Pzena Investment Management notes, “Over the past few years, U.S. large-cap indices have been dominated by extreme momentum stocks mostly levered to the AI theme.”

That dynamic has reshaped index behavior and complicated the debate between passive and active approaches.

Momentum-driven markets often reward the biggest winners, and that has been evident across major benchmarks. Yet such conditions are not always favorable for strategies that focus on valuation discipline.

The same report observes, “These types of one-way markets are particularly challenging for active managers, who are conditioned to sell outperformers and recycle capital into undervalued stocks.”

When leadership narrows and price trends accelerate, strategies that prioritize fundamentals can temporarily fall behind.

That recent stretch has produced a striking statistic: “In fact, nearly 34% of active U.S. large-cap funds underperformed their respective benchmarks over the past two years.”

At first glance, the numbers appear to strengthen the case for passive investing. However, the structure of the benchmark itself deserves scrutiny.

The Russell 1000 Value Index is commonly viewed as a straightforward proxy for value exposure. But the composition of the index tells a more complicated story.

According to the analysis, “In our view, the Russell 1000 Value Index (R1000V) no longer represents a true value portfolio.” Instead, structural rules and market concentration have reshaped the index into something closer to a broad market portfolio with a value tilt.

Today the index holds hundreds of companies and includes several mega-cap technology names alongside businesses traditionally viewed as value plays. “It currently contains 870 stocks,” the report notes, and its largest positions include companies such as Alphabet while also holding Amazon and Meta. Even certain retail giants included in the index carry growth-style multiples; Walmart, for example, trades “at approximately 45x forward earnings.”

The consequence is a widening gap between concentrated active portfolios and the benchmark itself. As the report explains, “the net result of the index composition issue is that our portfolio is much cheaper than the R1000V.”

Lower starting valuations have historically improved long-term return potential, which is central to the argument that passive value exposure may not capture the same opportunity set as targeted active selection.

Momentum has further distorted the comparison. The past two years represent what the report describes as “one of the most extreme” momentum environments on record. In that setting, stocks with strong price trends have surged while out-of-favor companies have lagged.

The resulting divergence is significant. Passive benchmarks have enjoyed multiple expansion, while certain value portfolios have actually become cheaper despite producing solid returns. For investors focused on fundamentals, that widening valuation gap may prove to be the most important development of all.

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Pzena U.S. Large Cap vs Passive