Pzena U.S. Large Cap vs Passive

Over the past few years, U.S. large-cap indices have been dominated by extreme momentum stocks mostly levered to the AI theme. These types of one-way markets are particularly challenging for active managers, who are conditioned to sell outperformers and recycle capital into undervalued stocks. In fact, nearly 34%¹ of active U.S. large-cap funds underperformed their respective benchmarks over the past two years. Despite U.S. indices’ abnormally high returns since the advent of the AI revolution, we believe the passive option is not an effective way to achieve true value exposure – which has historically generated above-market returns² – within the U.S. large-cap market. Our view is based on the following three key factors: 1) index composition, 2) starting point valuation, and 3) the current anomalous market environment.

INDEX COMPOSITION

In our view, the Russell 1000 Value Index (R1000V) no longer represents a true value portfolio.  It currently contains 870 stocks³, since Russell’s growth and value indices are required to have the same aggregate market cap, and its largest holding is Alphabet, with a combined 3.92% weighting of A and C share classes. The index also includes Amazon, Meta, and other richly valued non-tech stocks like Walmart, which trades at approximately 45x forward earnings. This dynamic is a result of the extreme concentration in the broader U.S. market, as illustrated in Exhibits 1 and 2.

Exhibit 1: Number of Holdings

^{Source: Source: FactSet, Pzena analysis
Calendar year-end data in US dollars through 2025.}

Exhibit 2: Weight of Russell 1000 Growth Index’s Top 5 Holdings

^{Source: Source: FactSet, Pzena analysis
Calendar year-end data in US dollars through 2025.}

STARTING POINT VALUATION

As demonstrated by the portfolio characteristics of our Large Cap Value strategy (Exhibit 3), the net result of the index composition issue is that our portfolio is much cheaper than the R1000V. In our view, this disparity in starting valuations is favorable in terms of expected forward returns.

Exhibit 3: Portfolio Characteristics: Pzena Large Cap Value

^{*Pzena’s estimate of normal earnings;
**Large Cap Universe Median (500 largest U.S. companies) Source: FactSet, Russell 1000® Value Index, Pzena Analysis as of 12/31/2025.}

Anomalous current market environment

We’ve been operating in what we see as an anomalous market environment for the past two years; specifically, the momentum-driven U.S. market has been one of the most extreme in history.

Given our disciplined approach to value investing, this two-year momentum-driven period has presented challenges in terms of relative returns; however, it has also created compelling company-specific opportunities moving forward. Our investment process and philosophy focus on investing in companies that are undervalued, often due to idiosyncratic issues that have depressed their valuations. In other words, we often invest in out-of-favor companies trading at a discount, rather than chasing momentum.

Exhibit 4: U.S. Large-Cap Stocks Highest Quintile of 9 Mo. Price Momentum

Trailing-24-Month Cumulative Relative Returns vs. Universe (1952 – December 2025)

^{Source: Empirical Research Partners Universe is the largest ~750 US stocks. Momentum is defined as the best quintile of the largest ~750 US stocks measured by nine-month daily price trend. All equal-weighted data from January 31, 1952 – December 31, 2025.
Does not represent any specific Pzena product or service. Past performance does not predict future returns.}

Exhibit 5: U.S. Large-Cap Stocks Highest Quintile of 9 Mo. Price Momentum

Cumulative Relative Return vs. Universe 2024 – Dec 2025

^{Source: Empirical Research Partners
Universe is the largest ~750 US stocks. Momentum is defined as the best quintile of the largest ~750 US stocks measured by nine-month daily price trend. All equal-weighted data from January 1, 2024 – December 31, 2025.
Does not represent any specific Pzena product or service. Past performance does not predict future returns.}

The timing of resolution of these idiosyncratic issues is uncertain. Our portfolio may experience above-average performance in certain years if concerns ease for multiple holdings, and vice versa. For example, in 2022/23, we experienced a period of strong relative performance, during which some of our larger holdings benefitted from positive resolutions to their company-specific headwinds. Since then, we’ve found a broad-based set of new opportunities, reflecting difficult operating environments for several companies that are now in the portfolio at what we believe to be very attractive valuations.

The momentum-driven nature of the market has meant that companies whose operating environments have not improved have been left behind – or worse – while stocks with positive momentum (increasingly represented in the R1000V) have experienced one of the biggest runs in history. The annualized returns for our U.S. large-cap strategies over the past two years – 8.68% and 10.75% for Large Cap Focused Value and Large Cap Value, respectively⁴ – were in line with their historical averages, reflecting a combination of positive resolutions and instances where the issues weighing on valuations did not improve. In contrast, the R1000V has experienced significantly above-average performance over the last two years (17.7% vs. a 12% historical average⁵) and now trades at an unusually high valuation premium relative to our portfolio.

Exhibit 6: Pzena Large Cap Focused Value vs. Russell 1000 Value Index

Relative Forward Price/Earnings Premium (Discount) 2002 – 2025

^{Source: FactSet, Pzena analysis}

The R1000V is clearly more expensive than our U.S. large-cap portfolios, and its composition does not currently reflect a reasonable value option, in our view. Over the past two years, the market has been driven by a singular theme, and momentum has taken over, which is not a conducive environment for our strategy on a relative basis.

We believe the fundamentals and valuations of our portfolio companies are very attractive when viewed over the long term. Notably, the valuation gap between our portfolio and the index (see Exhibit 6) is among the widest in history – a function of both our Large Cap Focused Value strategy being cheaper than average (34th percentile on a forward P/E basis) and the R1000V being far more expensive than average (97th percentile)⁶. We maintain that a targeted, research-driven, active strategy is crucial to generating alpha, and we believe that our U.S. large-cap portfolios are especially well positioned to achieve long-term returns in excess of the overvalued R1000V benchmark.

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<sup>Footnotes: 
1. Source: eVestment, Pzena analysis
2. Source: Kenneth R. French data
3. As of Dec. 2025 
4. Jan. 2024 – Jan. 2026, annualized, gross of fees
5. Source: Russell® 1000 Value Index
6. Source: FactSet, Pzena analysis; Dec. 2002 – Dec. 2025</sup>

Pzena Large Cap Value Strategy

Performance Summary (USD)

Pzena Large Cap Value

Calendar Year Returns (USD)

Pzena Large Cap Focused Value Strategy

Performance Summary (USD)

Pzena Large Cap Focused Value Strategy

Calendar Year Returns (USD)

^{Past performance does not predict future returns. Returns could be impacted, positively or negatively, by currency fluctuations, where applicable.
See Disclosures Section.}

^{Gross rates of return are presented gross of investment management fees and net of the deduction of transaction costs. An investor’s actual return will be reduced by investment management fees. Net Returns are derived using a model fee applied monthly to Gross returns. Pzena uses the highest tier fee schedule, excluding performance fees, to illustrate the impact of fees on performance returns. As product fees change, the current highest tier schedule will be in effect.}

^{Composite returns are benchmarked to the Russell 1000® Value Index (the “Index”). The benchmark is used for comparative purposes only. The Russell 1000® Value Index measures the performance of the large-cap value segment of the US equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. The Index cannot be invested in directly. The performance of the Index reflects the reinvestment of dividends. The Pzena Large Cap Value strategy is significantly more concentrated in its holdings and has different sector weights than the Index. Accordingly, the performance of the Composite will be different from, and at times more volatile, than that of the Index.}