Index Funds’ Style Drift Undermines True Value Investing Principles

The rise of passive investing has created a new dynamic in markets. But indexing’s inherent style drift risks misunderstanding true value philosophies.

As assets poured into passive vehicles like index funds and ETFs, their accumulation of market share pushed valuations ever higher.

Owning the market came to implicitly mean over-owning richly priced growth stocks. Weighting by market capitalization, not intrinsic value, supported bubble tendencies.

Meanwhile, active value managers who stick to fundamentals get labeled as underperforming. But their discipline means avoiding the most overvalued market segments.

This divergence has led to a common but misguided narrative. Value’s recent struggles are seen as proof of the strategy’s failure rather than its proper application.

In reality, prudent value analysis still works. But investors must distinguish it from passive index exposures masquerading as value.

True valuation-driven investing remains anchored in business merits, not benchmark optics. Patience during manias gets rewarded over long-term horizons.

Passive “value” is an oxymoron. Genuine active value endures — distorted perceptions aside.