Active investors face an increasingly challenging landscape as the quest for “alpha”—the pursuit of returns exceeding the market benchmark—becomes more elusive. In a revealing note shared by Torsten Slok, chief economist at Apollo Global Management, he underscored a sobering reality: “There is no alpha left in public markets.” This assertion is backed by data highlighting significant shifts in market dynamics that complicate efforts to outperform the S&P 500.
One of the most concerning trends is the aging profile of companies at the point of initial public offering (IPO). In 1999, the median age of companies going public was a mere five years, but by 2022, this had risen to eight, and it currently stands at 14 years. This trend means that firms are delaying their market entries, often missing out on the explosive growth phases that traditionally offered investors the most substantial gains. A contributing factor is the substantial venture capital available, allowing startups to remain private longer and avoid the regulatory scrutiny of public markets. Compounded by the Federal Reserve’s interest rate hikes beginning in 2022, this shift has further stifled IPO activity, resulting in fewer investment opportunities.
Moreover, market concentration is reaching unprecedented levels, complicating matters for active investors. Currently, stocks holding a weight of 3% or more in the S&P 500 represent 35% of the index’s total market capitalization. This concentration is at its highest since the dot-com era and is largely driven by the boom in artificial intelligence. Notably, a group of seven companies—often referred to as the “Magnificent 7,” which includes Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, and Tesla—are fueling most of the earnings growth and capital expenditures within the index. According to Slok, the AI boom has driven price-to-earnings ratios of the top companies beyond levels seen during the technology bubble of the late 1990s, signaling that valuations are becoming unsustainably high.
In this environment, the performance of active fund managers is under scrutiny. Traditionally tasked with identifying market inefficiencies and delivering superior returns, many are falling short. The latest SPIVA report from S&P Global reveals that an alarming 88.29% of large-cap funds have underperformed the S&P 500 over the past 15 years. This underperformance rate remained stable around 86% over both ten- and five-year periods, with nearly three-quarters of large-cap funds failing to beat the benchmark in the most recent year.
For individual investors, the current market climate necessitates a rethink of traditional investment strategies. With fewer companies entering public markets, increased concentration among index heavyweights, and the ripple effects of passive investment strategies gaining dominance, a competitive edge via active management appears increasingly unlikely. Unless there is a resurgence of younger companies opting for public offerings or a potential cooling off of the current AI frenzy, the existing dynamics are likely to persist. As Slok aptly noted, the possibility of finding “alpha” in public markets may have already faded into the past.
