Best Mutual Funds: Are Value Funds Critical For Diversification?

For the Third year in a row, no value funds made IBD’s Best Mutual Funds list. But that doesn’t mean they’re not worth a look.

Some value funds just missed qualifying for 2026. This reflects a relative shift in the markets: The factors that favored growth stocks, such as historically low interest rates and an AI-powered tech bonanza, are butting up against stabilizing rates, investors’ embrace of companies with current cash flows (rather than future cash flows) and a retreat from frothy AI hype.

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Then there’s the cyclical nature of growth versus value. Growth stocks — consisting of rapidly expanding companies like tech firms — outperform over certain periods. Value stocks — solid businesses with steady free cash flow that can be bought at a discount — gain luster at other times.

Best Mutual Funds

The 11th annual IBD Best Mutual Funds Awards — marking more than a decade of covering winning funds — can help you figure out which funds to buy or sell. We looked at all the mutual funds with at least a 10-year track record.

Each award-winning fund had to outperform its benchmark for the past one, three, five and 10 years. This demonstrates its ability to outperform in both the short term and long haul across bull and bear markets.

Among funds at least 10 years old, that’s a feat only 14% of eligible funds can claim.

This year, 536 funds qualified for recognition.

Read Our Full 2026 Special Report On The Best Mutual Funds

Value Funds, The ‘Permanent Underdog’

“Value funds have felt like the permanent underdog for much of the last decade,” said Patrick Huey, a certified financial planner in Naples, Fla. “For long-term investors, I still see value as a critical diversification sleeve, not a relic. When you own both value and growth, you’re admitting we don’t know which style will dominate the next 10 to 15 years. That humility has real risk-management benefits.”

Author of “History Lessons for the Modern Investor,” Huey adds that interest rates will help determine which type of fund outperforms in 2026.

“If we stay in a world of higher-for-longer real rates, markets tend to favor companies with current cash flows and reasonable prices — classic value territory — over very long-duration growth stories,” he said.

Value Fund Managers Poised To Profit in 2026

Some advisors see 2026 as an inflection point in the growth-value pendulum. Historically, value stocks’ outperformance comes in multiyear bursts — and there are signs of sector rotation amid wide valuation spreads.

A big gap between expensive and cheap stocks remains despite a recent narrowing as the once-soaring “Magnificent 7” tech giants hit turbulence. Value fund managers are poised to capitalize on this gap to find stalwart companies with strong fundamentals and underpriced shares.

“Growth trades at premiums that leave little room for error,” said Mike Casey, a certified financial planner in Alexandria, Va. “Value offers discounts in financials, energy and industrials — sectors that benefit from normalized rates and broadening earnings.”

He’s particularly high on financials as digital currency gains traction. “Cryptocurrency and digital assets are merging into (traditional) banks,” Casey said. “Some of these new crypto companies are getting bank charters. And some banks are moving into crypto” and offering more bitcoin-related services.

Value Funds’ Place In A Diversified Portfolio

Casey has a long-standing appreciation for the role of value funds in a diversified portfolio. For a 35-year-old investor with an aggressive strategy, he might allocate 25% in value funds with 50% in growth and the rest in alternative assets and fixed income.

“Generally speaking, we want value to be a good piece of every portfolio, regardless of (a client’s) age and risk tolerance,” he said.

Growth funds don’t produce higher returns in a risk-free vacuum. That’s why an investor’s light appetite for risk can make value funds more attractive.

“Value funds may not be ‘lagging’ growth funds from a risk-adjusted perspective,” said Michael DeMassa, a certified financial planner in Sarasota, Fla. “When everything’s going up, you don’t understand the level of risk you’re taking. We like to add value funds to buffer the concentration in growth sectors because value takes some risk off the table and generally performs better than growth in challenging markets.”

Value Funds To De-Risk Technology Weighting

As of Dec. 31, 2025, the combined value of just four growth stocks — Nvidia (NVDA), Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL) — was equal to about 26% of the S&P 500. This helps explain why DeMassa is adding value funds to client portfolios in recent months “to de-risk the technology weighting … and increase the diversification across sectors and companies.”

The most famous living value investor, Warren Buffett, built a storied career around his own brand of bargain-hunting: finding established, well-run businesses that produce predictable free cash flow along with durable moats to defend against rivals.

“The label ‘value’ now often means ‘reasonably priced quality’ rather than underpriced alone,” Casey said. “The core never changes: pay less than something is worth, avoid speculation and let time work.”

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