In an interview on Bloomberg TV, Apollo Global Management Inc.’s Chief Executive Officer Marc Rowan painted a somber picture for active managers seeking to outperform public markets. He remarked that the increasing dominance of passive index investing has led to a heightened correlation among stocks, making it increasingly difficult to identify undervalued opportunities.
“If you actually want alpha, outperformance, you need to step away from public markets,” Rowan asserted. He elaborated that the rise of passive investing has driven up valuations across the board, squeezing out the margins for error that once allowed active managers to generate excess returns.
Rowan’s comments echo a growing sentiment among investment professionals who are grappling with the challenges of navigating a market increasingly dominated by index funds and exchange-traded funds (ETFs). These passive vehicles, which track broad market indices, have attracted trillions of dollars in inflows, reducing the liquidity of individual stocks and making it more difficult for active managers to identify undervalued opportunities.
The rise of passive investing has been fueled by several factors, including the proliferation of low-cost ETFs, the ease of execution, and the perception that active managers consistently fail to outperform their benchmarks. As a result, the proportion of assets managed passively has soared in recent years, reaching over 50% in some asset classes.
Rowan’s warning highlights the increasing difficulty of generating alpha in public markets. With valuations elevated and correlations high, active managers are facing an uphill battle in their quest for superior returns. While some managers may be able to overcome these challenges by employing niche strategies or leveraging unique insights, the overall environment for active management is becoming increasingly challenging.
Apollo, with its $500 billion in private credit assets, is well-positioned to capitalize on the opportunities that lie outside of public markets. Private credit, which encompasses loans and debt instruments issued by non-publicly traded companies, offers the potential for attractive risk-adjusted returns due to its lower correlation with public markets and the ability to negotiate more favorable terms with borrowers.
Rowan’s comments underscore the evolving landscape of asset management and the challenges that active managers face in today’s market environment. While public markets remain a significant source of investment opportunities, the rise of passive investing has heightened the difficulty of generating alpha. Active managers who can adapt to this changing landscape and identify undervalued opportunities outside of traditional asset classes are likely to be the ones who thrive in the years to come.