AI is Taking Over the Value Style Too

Value allocations no longer provide the diversification from growth that investors may assume because their exposure to mega-cap technology and AI investment cycles has increased.

• After the latest Russell reconstitution, Amazon became the largest constituent of the Russell 1000 Value Index.
• Information technology exposure in the index rose from 11.7% to 18.6%, while Magnificent Seven exposure increased from 6% to 16%.
• Advanced Micro Devices and Micron moved from value to growth classifications as their fundamentals, valuations and growth expectations changed.
• Overlap between the Russell 1000 Value and Growth indexes reached roughly 34.5%, meaning a 50/50 allocation could hold about 15% to 17% in the same companies.
• Correlation between the two indexes increased to nearly 0.3 from almost zero a few years earlier, while S&P Dow Jones Indices considers changing its style methodology to include intangible assets and free cash flow in value measures.

Takeaway: Investors should assess actual holdings, factor exposures, technology weights, valuation risk and concentration rather than relying on the growth or value label to deliver diversification.