Morgan Stanley’s Large-Cap Growth and Large-Cap Value teams discuss Russell Reconstitution at Morgan Stanley; opportunity set for active managers beyond mega-cap tech
2026 Russell Reconstitution: A New Lens on Growth, Value and Active Management | Morgan Stanley
The annual Russell Reconstitution often prompts investors to revisit portfolio allocations, but this year’s rebalance sparked an especially interesting conversation about style investing. With several mega-cap technology companies now appearing in both the Russell 1000® Growth and Russell 1000® Value indexes, traditional distinctions between “growth” and “value” appear less clear than ever. For our Large-Cap Growth and Large-Cap Value teams, however, the reconstitution didn’t change how they invest. Instead, it reinforced a philosophy long shared by both teams: indexes classify companies, but fundamentals drive investment opportunities and decisions. We sat down with Brad Galko and Jason Kritzer, Co-Heads of the Value Equity team and Doug Rogers, Co-Head of the Core
Growth Equity team to discuss what this year’s rebalance means for investors. Has this year’s reconstitution changed what it means to be a “growth” or “value” stock? Brad: Not in our view. A company’s inclusion in a growth or value index does not change its underlying business or intrinsic value. Style classifications evolve over time, but they are not permanent labels. Our Opportunistic Value philosophy has always been driven by fundamentals rather than index labels. We seek high-quality companies trading below our estimate of intrinsic value. We evaluate companies on balance-sheet strength, returns on invested capital, free cash flow, leverage – and whether the market is appropriately valuing the company’s long-term prospects. Doug: We view it similarly. Our objective is not to own “growth stocks” simply because they appear in the growth index. It is to identify businesses capable of delivering durable, differentiated growth over long periods. We look for growth outliers—companies that continue to innovate, expand their addressable markets and compound earnings over time – regardless of how they are classified. The Russell Reconstitution may shift style labels, but it does not change what makes a great business. If traditional style boxes are becoming less distinct, how should investors think about diversification? Doug: Diversification today requires looking beyond sectors. Increasingly, it means understanding the end markets companies serve and the underlying drivers of their businesses. Artificial intelligence (AI) is a good example. While often viewed as a technology theme, its applications extend well beyond the tech sector. Industrial companies building electrical infrastructure, utilities meeting rising power demand and software companies embedding AI into their products are all participating in the same long-term, secular growth theme. Simply owning companies across multiple sectors does not necessarily provide meaningful diversification if they are all exposed to the same economic driver. Brad: The same principle applies from a value perspective. We believe investors should be intentional about the risks they take. It’s possible to gain diversified exposure to a long-term investment theme while managing concentration risk by investing in businesses with different customers, competitive dynamics and sources of cash flow. How has the rebalance changed the opportunity set for active managers? Doug: One of the biggest implications is a broader opportunity set for active managers. Rather than concentrating exposure in a handful of mega-cap tech stocks, we can express our highest convictions across a wider range of businesses benefiting from similar secular trends – for companies outside the AI theme that fit our growth-outlier philosophy. For example, semiconductors remain central to the AI story, but they are not the only way to invest in it. Memory manufacturers, semiconductor equipment providers, foundries and infrastructure companies are all benefiting from many of the same long-term demand drivers while offering different risk-return characteristics. More broadly, AI is becoming a productivity tool across industries. Consumer companies are using it to improve marketing, enhance operations and increase efficiency. Over time, those gains can become meaningful drivers of future earnings growth, even for businesses not traditionally viewed as AI companies. Jason: That last point is key. Health care companies, for example, are using AI to make their sales organizations more efficient. With so much attention on hyperscalers and the companies most directly tied to AI, investors can overlook businesses where AI is quietly improving operations and long-term earnings power. We see the potential for many of these companies to close the gap between market price and their true intrinsic value. Many of today’s largest technology companies now exhibit characteristics traditionally associated with value investing. How do you think about that? Brad: The characteristics we have always valued – strong free cash flow, high returns on invested capital and disciplined balance sheets – are increasingly found in many of today’s largest tech companies. At the same time, these businesses are continuing to invest aggressively for future growth. That does not automatically make them value stocks, nor does it exclude them from consideration. We apply the same investment framework to every company, regardless of style label: Can it continue compounding intrinsic value? Are current expectations appropriately reflected in the stock price? Does the potential reward justify the risk? Those questions matter far more than which index a company happens to sit in. Beyond technology, where are you finding compelling opportunities? Jason: Health care continues to stand out. The sector’s weighting in the Russell 1000 Value Index is near multidecade lows despite attractive valuations, improving pipelines and strong balance sheets across many pharmaceutical companies. As in any sector, selectivity remains critical. We see a disconnect between current market sentiment and long-term fundamentals. We are also finding opportunities in industrials and materials, as companies continue investing in reshoring, infrastructure and supply-chain resilience. Given the shifting geopolitical landscape, we believe those trends are likely to outlast short-term market rotations. Has this year’s reconstitution changed how you think about portfolio risk? Doug: The rebalance has reinforced the importance of understanding where portfolio risk truly resides. We do not simply look at sectors; we look at how individual positions contribute to overall portfolio risk and whether multiple holdings are exposed to the same end markets. Take semiconductors, for example. Rather than concentrating risk in a single company or sub-industry, we can gain exposure to many of the same secular growth drivers through adjacent businesses such as memory, storage, semiconductor equipment and infrastructure providers. While these companies may serve similar customers or benefit from the same AI investment cycle, they often have distinct business models and risk profiles. Ultimately, we want our active risk to come from our highest-conviction investment ideas—not from unintended portfolio concentrations. Brad: We think about risk in much the same way. Every investment begins with weighing the potential reward against the risk. Whether we are overweight or underweight a company relative to the benchmark, those are active decisions that should reflect our fundamental conviction. The Russell Reconstitution has not changed that framework. It has reinforced the importance of looking beyond traditional classifications. Companies may sit in different sectors or industries yet still be driven by the same underlying economic forces. Understanding those relationships helps ensure the risks we take are intentional and consistent with our investment thesis. Index definitions: Russell 1000® Value Index: An unmanaged index of U.S. large-cap value stocks. Russell 1000® Growth Index: An unmanaged index of U.S. large-cap growth stocks. Risk Considerations: The value of investments held by the Strategy may increase or decrease in response to economic and financial events (whether real, expected or perceived) in the U.S. and global markets. The value of equity securities is sensitive to stock market volatility. 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