AI Boom Bends the Definition of Value Investing

AI Boom Bends the Definition of Value Investing With major technology indices up more than 20% in the last 12 months, a recent report shows how some institutional value investors are retooling their models to participate in the AI-driven rally. The shift involves adopting a more flexible definition of value, a move that has helped at least one fund outperform benchmarks at a time when traditional value strategies continue to lag. ## Background For most of the last decade, growth-oriented investing has decisively outperformed value strategies. Traditional value investing seeks to buy stocks at a discount to their intrinsic worth, using metrics like the price-to-earnings (P/E) multiple, which compares a company's stock price to its per-share earnings. These frameworks favor mature companies in sectors like financials and industrials but often fail to capture the potential of technology firms, whose value is tied to intangible assets and future growth prospects rather than current earnings or book value. The market tape has been dominated by a narrow group of AI-related companies. This concentration has driven headline index performance while market breadth—the number of stocks participating in the rally—has remained weak. Investors sticking to strict, low-multiple disciplines have found themselves underexposed to the market's primary drivers and have generally underperformed indices weighted heavily toward names like Nvidia, Microsoft, and other technology giants. ## Why it matters This adaptation represents a significant philosophical challenge for the value investing community. If managers begin to incorporate high-growth, high-multiple stocks into their portfolios, the line between value and growth investing blurs. It forces a difficult question: is this a necessary evolution to account for a secular technology shift, or is it a capitulation to momentum-chasing after years of underperformance? The answer will determine the flow of capital across entire sectors. The managers on the wrong side of this trade are the purists. Funds that continue to adhere to Graham and Dodd-style deep value principles risk further underperformance and client redemptions if the AI theme proves durable. Their thesis rests on an eventual mean reversion where leadership rotates back to cheaper, old-economy stocks—a rotation that has failed to materialize in any sustained way. ## What to watch The key observable will be the commentary from major value fund managers in their upcoming investor letters and conference calls. A broad strategic pivot is likely if more funds announce mandate changes to include high-growth stocks, even at what appear to be stretched valuations. The call is wrong if traditional value sectors like financials and industrials mount a sustained recovery, prompting managers to double down on their core, low-multiple strategies by the end of August 2024.