The lofty valuations of AI stocks in the past few years have dredged up memories for some of the time before the dotcom bubble burst in 2000.
This burst, which led to steep fall in the MSCI World over a period of two years, was due to overinvestment in internet companies that eventually couldn’t live up to their value despite the internet becoming a part of everyday life. It’s simple to see the similarities to today: even with a general consensus that AI will be a world-changing technology, it’s hard to be clear on the companies which will benefit most.
But a striking phenomenon of the dotcom bubble bursting was the performance of value stocks in the aftermath, which shot up as the rest of the market fell. The past is never a perfect indicator of what will happen to markets in the future, but some investors believe value stocks could deliver the same bumper returns if the AI bubble burst.
Investors can see this through the Fama-French HML Factor Data. This is an educational data measure that shows how value-driven stocks perform in comparison to growth stocks. The chart below shows how dramatically value outperformed growth in the period immediately following the dot-com crash.
What does value really mean?
There is no single definition of what qualifies a stock as ‘value’. Generally, it refers to stocks that are unloved by the market, but if these stocks are worth more than their price will depend on who you ask. This makes it a popular area of the market for fund managers that select their own stocks, because it allows them to use their own strategies to see appeal they think others, or indices, might be missing.
Indices offer value options too, but their performance has differed widely based on criteria. The MSCI World Value index, for example, has lagged behind the standard MSCI World in the past five years, with returns of 65.8% and 76%, respectively. But the MSCI World Enhanced Value Index has beat both with a 101.65% return.
How are these value metrics so different? MSCI World Value Index chooses its holdings based on book value (essentially the value of a company’s assets) divided by share price, dividend yields, and 12-month forward earnings multiples. It then gets a score to sort it between value and growth. But a stock can fall in both of these baskets which means the returns of this index aren’t always so different from the broader market.
MSCI World Enhanced Value, on the other hand, uses different metrics, has stricter criteria, and an all-in or all- out approach for if stocks qualify. This creates a smaller qualifying group and a much different return than the standard MSCI World.
This stricter criteria meant that on a longer- term view, including in the early 2000s, the enhanced value strategy won out. However, in times that were strong for growth, such as the 2010s, this index lagged behind.
Balancing growth and value
Value stocks don’t come without risk, and some are cheap for a reason. By relying them on completely, investors would likely have missed out on some of the most impressive market performers in recent years, such as Nvidia and Alphabet. For this reason, many investors choose to use a blend. Indices like the MSCI World are, by nature, weighted more heavily towards growth. So having a separate portfolio weighting that is aimed specifically at value can be a way to even out this risk.
Some value stocks will present a smoother ride than broader equity markets, as many measures of value include stocks that pay high levels of dividends, which tend to be more mature businesses. But other value stocks are discounted severely because the company has had a difficult period. This does involve risk, but it can still be a diversifier to other parts of your portfolio.
Value investments can be hard to sniff out, because it involves deep analysis of why they are trading more cheaply in the first place, as well as what their potential is for the future. There’s always a possibility of buying a stock that looks good value at the time, but keeps sinking instead of recovering. Some prefer to leave it up to the experts and invest through funds. The table shows the best performing value funds of the past 10 years offered on AJ Bell’s platform. Note that these funds will each have different metrics to constitute value, and past returns don’t guarantee future performance.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
