You might be invested in “dumb” growth.

According to a recent report from Newport Beach, Calif.-based Research Affiliates, traditional growth indexes often produce negative excess returns and fail to provide faster growth. Active growth managers also tend to underperform the market.

“Those who believe the markets are efficient assume that growth stocks are trading at high multiples because they will have faster future earnings growth, or that they’re less risky than value stocks,” says Chris Brightman, CIO of Research Affiliates. “We’ve found that growth stocks are, in reality, just overpriced stocks.”

A traditional growth index, explains Brightman, has been designed as the inverse of a value index. Style indexing and style-box investing has led to growth and value indexes that respectively represent the most expensive and least expensive parts of the market.

While investors have associated relatively cheap value stocks with excess returns since the days of Benjamin Graham, there is no such return premium associated with expensive stocks, notes Brightman.

“The average value manager outperforms before fees,” he says. “Unfortunately, because of performance chasing, the average investor in value funds still underperforms the market. The underperformance is even larger after fees. The average growth manager underperforms before fees, underperforms even more after fees, and because of performance chasing, the average investor in growth funds performs worst of all.”

Growth-oriented managers and stock pickers tend to track the indexes, says Brightman, which explains their underperformance.

When investors say “growth,” they usually mean growth in earnings per share (EPS) as a portion of total return, says Brightman. Active or indexed, traditional growth provides lower dividend yield, negative valuation changes and negative earnings growth. Indeed, between January 1968 and March 2017, a traditional growth index posted a negative real return from dividends, -0.7 percent, valuation, -0.06 percent, and EPS, -0.06 percent.

“We ask whether we’ve learned anything since these first indices were created that could simplify a portfolio and transparently and systematically position it to have future growth in EPS that is materially higher than the market. If that’s possible, then can we actually do it in a way that produces higher returns.”

Eugene Fama and Kenneth French found that profitability and investment impact equity returns. The study by Research Associates finds that those factors also affect earnings growth. While higher profitability delivers higher growth in earnings, it may also lead to negative excess returns from low dividend yields and depreciation of valuations. The paper uses return on equity as a measure of profitability.

Research Affiliates found a disconnect between internal investment, as measured by growth of total assets, and growth in earnings. Companies that invest aggressively to expand their sales and assets despite a low return on capital tend to perform poorly because, according to Brightman, “growth in the size of a company does not produce wealth for the investors in that company.”

The researchers attributed the poor performance to negative EPS growth, and were able to correlate low levels of investment with positive EPS growth: When businesses attempt to rapidly grow scale, it often results in a dilution of EPS and lower returns for shareholders.

“One explanation is that investors mistake growth in assets for wealth creation,” says Brightman. “Encouraged by investor enthusiasm and the compensation incentive for growth, management invests aggressively, thereby creating a low or even negative return on the marginal new capital invested. A low marginal return on capital lowers average EPS and destroys wealth for investors.”

For example, on the eve of the dot-com bubble in July 1999, Compaq, Yahoo  and WorldCom were all considered growth stocks, posting high levels of investment, but low returns on equity and earnings yields. Yahoo, the sole survivor of the trio, went on to post negative returns over the next 10 years.

In July 1999, smart growth stocks like Coca-Cola, Exxon and Kellogg had low levels of investment and high ROE, and went on to post subsequent 10-year total returns of 20 percent or more.

On the eve of the global financial crisis in July 2007, Wachovia, Merrill Lynch and Lehman Brothers were all similarly positioned with relatively high levels of investment as they loaded their balance sheets with mortgage-backed securities, and low ROE. At the same time, Kellogg, Exxon and Coca-Cola continued to generate high ROE with relatively low levels of investment.

As of July 2016, Research Affiliates identified Tesla, Facebook and Netflix as potential dumb growth stocks, noting that each continued to post high levels of investment with low or negative returns on equity. Historically, companies with those characteristics provided poor returns, according to the report.

In some cases, investors are falling victim to management more interested in empire building than in creating a sustainable business, according to the authors, and such behavior can be linked to compensation incentives for CEOs who rapidly expand company sales or assets.

Such companies seem to fail the tests of many ESG and socially responsible investors, says Brightman, as companies who grow rapidly may not be environmentally or socially sustainable, and companies expanding at the expense of shareholder interests could be examples of poor corporate governance.

“Reckless growth seems environmentally irresponsible, (but) this is a subject for further research,” says Brightman. “Because CEOs of larger companies are paid more than CEOs of smaller companies, CEOs have a financial incentive to grow the size of their companies regardless of whether or not growth creates or destroys wealth for investors.”

A smart beta growth strategy, according to Research Affiliates, combines the low investment factor with high profitability to create sustainably faster EPS growth. Since profitability negatively correlates excess returns with value, a smart beta growth index still provides some diversification to a value portfolio while offering earnings growth.

Over the 40 years from January 1968 to March 2017, a low-investment, high-profitability approach posted positive excess real returns from yield, valuation expansion and earnings growth. The authors attribute the outperformance to two main explanations. One, that these companies don’t invest because they face a high cost of capital, are somewhat riskier, and therefore investors will be compensated by higher returns

A second explanation involves investor behavior, assuming that profitability is persistent, but that many investors are unaware of this, therefore future profitability is not fully reflected in current prices.

“Low investment firms achieve higher growth in EPS by avoiding new projects with low returns on capital,” says Brightman. “Investors seem to find these low investment companies boring; despite healthy returns on capital and superior growth in EPS, investors set low prices for low investment firms. Investors in these low investment companies receive higher earnings and dividend yields, higher growth in EPS, and higher returns.”