Is value investing over?

It’s a difficult time for value investors.

The theory goes that value stocks – those trading at a lower price relative to their fundamentals than others – ought to outperform the rest of the market over the long term.

That’s not how it’s playing out. In the 10 years to 31 July 2026, the MSCI World Value Index generated an annualised return of 11.0%, compared to 13.3% for the MSCI World Index. The former index is based on the latter, with a tilt towards value stocks.

Momentum has been a more dominant investing factor during that time. The MSCI World Momentum Index has outperformed the main index over the last 10 years, with an annualised return of 15.2% during that time.

The rise of momentum investing was acknowledged in July 2026 by veteran value investor Terry Smith, CEO and chief investment officer of investment management company Fundsmith, when he told Fundsmith Equity Fund shareholders he would start paying more attention to the momentum factor when selecting investments.

“Periods of market exuberance can be particularly testing for valuation-driven investors,” said Cedric Jacque, investment manager at wealth manager Lloyd Capital. “Today, the combination of the artificial intelligence (AI) investment boom, strong momentum and elevated valuations has clear echoes of previous late-cycle markets.”

Why is value investing struggling?

There are two main reasons why value investing has trailed the returns of alternative strategies in recent years, though the two are interrelated.

The first is the rise of passive investing. According to data from investment research company Morningstar, passive funds’ share of the total investment fund market has risen from 12.4% in January 2008 to 46.4% in July 2026.

Most passive funds are market-cap weighted, meaning that the largest companies form the largest part of the fund. When investors buy index funds, they are therefore putting most of their investment into the largest companies in the index. In other words, the more popular passive investing becomes, the more money pours into the world’s biggest companies, pushing their share prices higher regardless of any change in their fundamentals. Indeed, many of their buyers are likely not looking at their fundamentals, but simply buying an index fund.

The rise of passive funds has coincided with an era during which technology stocks have ballooned in value. Developments like cloud computing, the proliferation of smartphones and, more recently, the AI boom have concentrated much of the market’s growth into tech stocks.

Tech is a tricky sector for value investors, because it tends to look far more at the future than the past or present. As of 21 August, software company Palantir Technologies traded at over 150 times its trailing earnings and 112 times its forecast earnings; the equivalent figures for Tesla are around 336 and 185 respectively. Tech investors price in expectations of rapid future growth that make the sector effectively off-limits for value-focused investors.

Terry Smith highlighted the convergence between these two phenomena in his shareholder letter, ascribing much of his fund’s underperformance to “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”.

Does value investing still work?

Smith hasn’t abandoned value investing outright, but he identified a need to “take more account of momentum… in our investment decisions”.

That shift has drawn criticism, though, with some arguing the current environment is precisely where it is most important to adhere to value investing’s principles.

“We agree with [Smith] that a market driven by passive flows and momentum can become increasingly distorted, that momentum sits at levels last seen in 1999, and that this will end badly,” said Lloyd Capital’s Jacque. “Where we part ways is on the remedy.

“We believe that becoming more of a crowd follower, and setting aside time-tested investment principles, is not a solution we can get behind,” Jacque continued. “We continue to believe that disciplined, bottom-up value investing, with a focus on earning power, is the right way to compound capital over the long term.”

Jacque argued that the passive investment boom isn’t a threat to patient value-driven investors, but rather creates an opportunity.

“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,” he said. “We are thrilled about that.”