Consider the recent pullback in alternative asset managers as a buying opportunity, with KKR & Co. Inc. (KKR) highlighted as a top pick due to its superior ability to return capital to investors. Apollo Global Management (APO) is another compelling long-term investment, as its recent 25% stock decline is viewed as an overreaction to overblown credit fears. The core thesis for Apollo is its unique, durable funding model that makes it a leader in financing modern infrastructure. For patient investors, Bank of America (BAC) presents a potential turnaround play as its earnings are poised to recover over the next few years. This improvement is expected as its large portfolio of low-yield bonds matures and is reinvested at today's higher interest rates.

KKR & Co. Inc. (KKR)

• The stock was mentioned as being down 21% recently, along with other alternative asset managers.
• Despite the recent downturn, Glenn Shore from Evercore named KKR as his number one favorite in the alternative asset manager group.
• The primary reason for this preference is KKR's superior ability to monetize investments and return capital to its investors (Limited Partners or LPs).
  • Historically, the private equity industry has faced a slowdown in selling its portfolio companies due to high interest rates and weak IPO/M&A markets. This has delayed returning cash to investors.
  • KKR has been a "consistent returner of capital," achieving a 2x return of capital versus most of their peers. This makes them stand out in an industry where many are struggling to exit investments.
• The company is also noted to have a "ton of dry powder" (cash ready to be invested), positioning it well to make new investments and generate good returns.

Takeaways

• KKR is presented as a best-in-class operator within the private equity space, particularly because it has managed to overcome the industry-wide challenge of delayed investment exits.
• For investors looking for exposure to alternative assets, KKR is highlighted as a top pick due to its strong execution and ability to return cash to investors, which is a key performance metric in the current environment. The recent 21% pullback could be seen as an attractive entry point.

Apollo Global Management (APO)

• The stock was mentioned as being down 25% recently.
• Apollo is described as the "king of private credit."
• The recent stock weakness is attributed to two main factors:
  1. Disappointing Earnings: Spread-Related Earnings (SRE), a key profit driver from its credit and insurance businesses, have shown slower growth (5% this year) than the double-digit growth investors had come to expect. This is due to lower interest rates (from the highs) and tighter credit spreads.
  2. Credit Fears: As a major player in private credit, the market worries that if a credit cycle turns and losses increase, Apollo would be significantly impacted, especially since much of the credit is held on its own balance sheet via its insurance company.
• The long-term view is very positive, centered on Apollo's "superpower": its access to long-duration liabilities from its insurance business.
  • This stable, long-term capital allows Apollo to finance complex, long-dated projects like data centers, digital infrastructure, and renewable energy farms, which are not suitable for traditional banks with short-term deposit funding.
  • This is seen as a safer and better model for the financial system than banks making long-term loans with short-term deposits.

Takeaways

• The recent drop in Apollo's stock seems tied to short-term earnings concerns and broader market fears about credit, which the podcast guests believe are overblown.
• Investors with a long-term horizon might see the current weakness as a buying opportunity. The core investment thesis is Apollo's unique and durable funding model, which allows it to be a leader in financing the modern economy's infrastructure needs, a secular growth area.

Other Alternative Asset Managers (BX, CG, OWL)

• The entire sector has seen a significant pullback despite a bull market. Blackstone (BX) is down 15%, and Blue Owl (OWL) is down 33%.
• The main fear driving the sell-off is the potential for a "turn in the credit cycle." However, the podcast guests noted that banks, asset managers, and even rating agencies like Moody's are not seeing signs of a significant credit downturn.
• They expect credit losses to rise from historically low levels (e.g., from 1% to 2%), but not to disastrous levels. The market may be overreacting to the "doubling" of losses rather than focusing on the still-low absolute level.
• Carlyle (CG) was mentioned as a firm whose stock was previously hurt by weaker private equity returns and slow capital return. Its performance is now said to be improving, with its major funds performing "right at the hurdle rate" (the minimum return needed to earn performance fees).

Takeaways

• The sell-off in alternative asset managers like Blackstone, Apollo, and KKR appears to be driven by fear more than fundamental problems, according to the podcast's experts.
• This could present a broad buying opportunity for investors who believe in the long-term growth of private markets and think the fears of a credit crisis are exaggerated. The discussion implies that the market is mispricing these stocks relative to the actual credit risk.

Citigroup (C)

• Citi is the best-performing large bank stock this year, up over 40%.
• CEO Jane Fraser is given major credit for making tough but necessary decisions to simplify the bank.
  • She exited many unprofitable international consumer banking businesses where Citi had very low market share. This was a major strategic shift away from the bank's decades-long "global bank" identity.
• Despite the successful cleanup, there are significant critiques of the remaining businesses:
  • Treasury and Trade Solutions (TTS): A "great," world-class global payments business.
  • Investment Bank: Described as "mediocre" and "second tier."
  • Credit Card Business: Large, but has not grown in 25 years.
  • U.S. Retail Bank: Considered "subpar," with a presence in only six major cities, which is too small to compete effectively with giants like JPMorgan and Bank of America.
• The stock historically traded below its tangible book value because its return on equity (ROE) was low (7-8%). It is now approaching 10%.

Takeaways

• The big gains in Citi's stock this year are a reflection of the successful simplification and cost-cutting strategy under Jane Fraser. The "easy wins" from this cleanup may be over.
• Future growth is described as "tough sledding." The bank consists of one great business and three struggling or mediocre ones. Investors should be cautious, as improving the performance of these weaker divisions will be a significant long-term challenge.

Bank of America (BAC)

• The stock has languished in recent years because the bank's return on equity is 500-600 basis points (5-6%) lower than competitor JPMorgan (JPM).
• The reason for this underperformance was a massive bet made during the low-interest-rate period of COVID. Bank of America invested over $600 billion of its excess deposits into long-duration, low-yield Treasury and agency securities (with sub-2% rates).
• When the Fed raised rates to 5%, these bonds became worth much less, creating huge unrealized losses on its books and depressing the bank's net interest income. This is the same type of mistake that contributed to Silicon Valley Bank's failure, though BAC is in no danger of failing.
• This situation is described as a "slow grind" that will take years to resolve as the low-yield bonds mature.

Takeaways

• Bank of America's earnings are currently being held back by a single, large, incorrect bet on interest rates.
• This creates a potential turnaround story. As these low-yielding assets mature and are reinvested at today's higher rates, BAC's net interest income and profitability should naturally improve, potentially faster than its peers. The stock has underperformed due to this known issue, and a patient investor could benefit as the problem slowly resolves itself.

Goldman Sachs (GS)

• CEO David Solomon's reputation has recovered after being "in the toilet" a couple of years ago due to the bank's failed foray into consumer lending (near-prime installment loans and the Apple Card).
• Goldman has wisely pulled the plug on this unprofitable venture.
• The new strategy is to focus on its core strengths (investment banking and trading) and grow its Asset & Wealth Management business. The goal is to create a more stable, less cyclical earnings stream, similar to the successful transformation of Morgan Stanley (MS).
• This involves reducing the amount of the firm's own capital tied up in investments ("reduce the capital intensity") and raising more money from third-party clients to manage.
• While Goldman has a large private markets business (comparable in size to Ares (ARES)), it is less profitable than peers and needs to build out its capabilities in infrastructure and real estate.

Takeaways

• Goldman Sachs is in the middle of a strategic pivot back to its roots, while trying to build a more durable asset management franchise.
• This is a long-term story. If successful, it could lead to a higher and more stable valuation for the stock, much like what happened with Morgan Stanley. The failed consumer strategy is now in the rearview mirror.

Traditional Asset Managers (IVZ, BEN)

• This group has been a consistent underperformer, described as "the bad."
• The core problem is the secular shift of investor money from high-fee, actively managed mutual funds to low-cost passive ETFs. The U.S. mutual fund industry has seen net outflows of about $300 billion per year for the last decade.
• This has caused massive "multiple compression," with stock valuations falling from 20-25x earnings in the 90s to around 9-10x earnings today.
• Many of these firms were "fat and happy" and failed to innovate or expand into growth areas like private markets.
• Invesco (IVZ) is highlighted as a company that has "worked hard" to evolve. It is now the #4 ETF provider globally and is diversifying, but is still held back by its decaying legacy active fund business.
• Franklin Resources (BEN) is also evolving under CEO Jenny Johnson, using its cash flow to buy private market firms. However, it also has a large legacy business and was hurt by a scandal at its Western Asset Management unit.

Takeaways

• Investing in traditional asset managers is very challenging due to strong industry headwinds. Investors should avoid firms that are not actively and successfully diversifying away from their legacy mutual fund businesses.
• Look for companies like Invesco and Franklin that are making clear, strategic moves into growth areas like ETFs and private markets. Even then, recognize that turning these large ships around is a slow and difficult process.

Investment Theme: Tokenization

• Tokenization is explained simply as the next step in digitizing financial assets to allow for instantaneous, real-time settlement (T+0), an improvement from the current T+1 (trade date plus one day) system.
• For the average retail investor, the direct benefit is minimal. The process of buying a stock is already nearly instant from a user's perspective.
• The main impact is on the back-office infrastructure of the financial system.
  • It could improve safety and soundness.
  • It could eliminate bank revenue from "float" (the interest earned on money held temporarily during the settlement process).
  • It could disrupt the highly profitable currency exchange and payments businesses, especially with the rise of stablecoins.
• The ultimate driver is evolving consumer behavior (use of digital wallets) and the desire for more efficient, 24/7 global markets.

Takeaways

• Tokenization is a long-term technological trend, not a short-term investment opportunity for most individuals.
• The key insight is to think about the potential second-order effects: it could be a long-term negative for traditional banks that rely on fees from payments, currency exchange, and float. It could be a positive for technology companies building this new infrastructure. This is a theme to watch over the next decade, not next quarter.