AI offers potential transformational change on the scale of the Industrial Revolution. It may well deliver but it is equally reasonable to ask: what if it doesn’t? Or, even if it does, what if that success is already priced into today’s lofty share prices? Value equities can play an important diversifying role, but only if done properly. Passive approaches will fail to deliver, says Duncan Lamont, Head of Strategic Research at Schroders.

Most investors in US equities have roughly half their money in technology stocks, once you include Amazon and Tesla (Consumer Discretionary), and Alphabet and Meta (Communication Services). That proportion has marched higher in recent years. Given that the US now makes up over 70% of the global developed market, investors in global equities fare little better. Long-held beliefs that a low-cost passive portfolio of global stocks delivers diversification – and avoids having too many eggs in one basket – demand urgent re-evaluation.

Additional examples of areas with AI dependency are utilities (energy production), real estate (data-centres), software-driven platforms and financials.

Can you do anything to manage this risk?

International diversification is an option that everyone should consider. 2025 showed the benefits of global diversification. Europe ex UK, UK, Japanese and emerging market equities returned 37, 35%, 25%, and 34% in USD terms vs 18% for the US. 

But we also have to remember that AI is everywhere. Stocks with a hint of an AI link in non-US markets have also performed exceptionally in recent years and make up significant proportions of their domestic/regional stock markets.

The world’s largest chipmaker, TSMC, for example, is 11% of MSCI EM and 58% of Taiwan’s market. The next four largest EM stocks – Tencent (AI platforms), Samsung Electronics (memory), Alibaba (cloud and AI services), SK Hynix (memory) – are all explicitly AI‑linked. Many large companies across developed markets have also benefited meaningfully from the AI wave.

Non-US markets remain cheap relative to the US, and catch-up potential exists. But that is not the same as saying they will shelter investors if an AI-driven sell off comes. Many would also be heavily exposed. Traditional sector tilts are equally complicated, for reasons already outlined. 

Value equities as a hedge against AI-risk (without sacrificing equity exposure)

Value investing remains underappreciated in this context. In the US, the correlation between value equities and the “AI trade” — using semiconductors and equipment as a proxy — has recently been low and falling. During the Dotcom selloff it even turned negative. 

This suggests value may offer valuable and significant diversification benefits.

• Value equities have had a low correlation with AI-stocks. Even more importantly, if we isolate those quarters where semiconductor stocks fell, value equities were roughly flat, on average, versus a 12% average decline for semiconductors. In deeper drawdowns (semiconductors down by 5% or more), semiconductors fell 15% on average. Impressively, value stocks fell only 1%.
• Value equities have delivered significantly better outcomes in down-markets for AI-stocks. One reason for this is the “margin of safety” that value investors benefit from, when buying companies on cheaper valuations. By only paying low prices relative to conservative appraisals of earnings or asset values, investors avoid areas of the market that require large growth to justify the price. So, when those areas of the market that have enjoyed a speculative boom retreat, value investors are often much more immune to those falls. This analysis is based on US value stocks but, in today’s environment, the case is even stronger for value outside the US.
• Buyer beware: passive “value” probably won’t help. The shift from active to passively managed strategies has been one of the biggest changes in investor behaviour of the past decade. While there may be some justifiable reasons, this specific situation is one where passive investing is likely to disappoint. Most value indices contain large allocations to the very same AI-names investors are seeking to avoid.
• Most value indices have significant exposure to Magnificent-7 and/or other technology names. I am confident that many investors in passive value strategies are unaware that they are allocating significant sums of money to the likes of Alphabet, Amazon, Meta, Microsoft and even Tesla. They could be in for a rude awakening. The “pure value” index — used in the earlier analysis — is different: it selects only the cheapest S&P 500 stocks and weights them by value characteristics, not size. This creates a much more differentiated portfolio and stronger diversification benefits. But it also takes no account of whether any of these companies are cheap for good reason. Just because a company is cheap vs its historical valuation does not automatically make it a good investment. There is a significant risk that some of the “pure value” index constituents turn out to be duds.

Why active value makes most sense

Active approaches can deliver the diversification benefits of pure value — low correlation to AI, resilience in AI related selloffs — while avoiding exposure to value traps. The goal is not simply to be cheap, but to be cheap relative to fair value.

This creates a portfolio that has a credible case for performing well if AI disappoints, maintains the long term return potential of equities, and can still perform if the AI driven bull market continues. If investors want to reduce their dependence on a single powerful narrative without selling equities, value investing stands out. The historical data show that value has tended to hold up well when the AI trade stumbles. But most passive value strategies won’t help: they are full of the same mega‑cap technology names that dominate the broader market.

An active value approach offers a way to maintain equity exposure, reduce AI concentration risk, and build a more resilient return profile. In an investment world increasingly shaped by a single theme, that kind of diversification is worth a great deal.

Further reading : Is everything becoming AI – and how can you respond without selling equities? By Duncan Lamont, Head of Strategic Research, and Simon Adler, Head of Global Value Equities, at Schroders.