Pension Pioneer on the Push Toward Passive

Published on
March 23rd, 2018
52 minutes

Pension Pioneer on the Push Toward Passive

The Interview ·
Featuring Marc Levine, Michael Green

Published on: March 23rd, 2018 • Duration: 52 minutes

Marc Levine, chairman of the Illinois State Board of Investment, has overhauled his pension's strategy by firing over 100 active managers and shifting to a reliance on passive management. He explains why he thinks pension managers around the world should follow his lead, in this interview with Michael Green, portfolio manager at Thiel Macro. Levine and Green also discuss the potential crisis of pension underfunding.


  • RA
    Robert A.
    26 March 2018 @ 16:53
    Vintage RV—Timely and important Subject matter, Great interviewer (Michael is just great), credentialed Guest who can articulate his/her views in a succinct manner and some “back and forth” in a civilized fashion. Excellent piece Gentlemen.
    • GB
      Gold B.
      5 May 2018 @ 01:59
  • AC
    Andrew C.
    27 March 2018 @ 04:03
    Some hand grenade thoughts; Illinois already is out of time; But what’s the alternative, with a time-horizon of more than 25years? Buy bitcoin? Buy gold now, and sell it when? Sit in cash? for how long? I do like this quote from Taleb’s new book - “don’t tell me what you ‘think'; tell me what’s in your portfolio" Passive or low cost?; The Buffet Bet showed that finding the manager that is gunna beat the Index is the issue. Paying somebody 2 & 20 to underperform would be worse than the index fund. And that is exactly what Marc said. He does have active managers running money, but given the problem, most money is indexed. Certainly better than what has been apparently happening over the passed decades with the pension funds. Can one of you active manager supporters out there give me three names of who will beat the SP500 over the next 10 years? PS: I am (and have been for about 1.5 years) in Uranium, shipping companies, small miners and assorted oil/services, after riding the US banks up from about 2011
    • GB
      Gold B.
      5 May 2018 @ 01:57
      Yes - which is exactly why disaster looms. There is no way out. Levine is probably making the most sensible decision given his position. Yet we can all see its flaws.
  • yB
    yvan B.
    27 March 2018 @ 14:53
    I don't usually write comments but this interview deserves one. I personally think there is a 'skills mismatch' in this interview: Michael is a highly technical practitioner while Marc is more a mixture of politician / academic. With all due respect, I thought that Marc's answers were a bit vague and unclear sometimes. In addition, concerning his views on equities, he seems to follow a Jeremy Siegel approach, where the conventional wisdom says that stocks become less volatile in the long run for long-term horizon holders (hence you should be heavily invested in stocks). I guess he should have a look at the work of Chicago professors Pastor and Stambaugh (2012, 'Are stocks less volatile in the long run?'). Even though the average return on stocks have been unusually high for the past 200 years (7% real) , you cannot be guaranteed to get the same returns on stocks in the future. The authors challenge the conventional wisdom by showing that the forward-looking measure of volatility differs from the one observe in the past. In the long run, uncertainty about the average return compounds over time and offset the mean reversion force (that tend to reduce equity volatility in the long run). Hence, they conclude that stocks are more volatile in the long run. To conclude, I personally think that Michael Green should interview more technical practitioners (or even academics). Otherwise, I am a great RV fan and thanks for all your contributions.
    • GB
      Gold B.
      5 May 2018 @ 01:56
      Yes, but at the same time it is far better to have someone as sharp as Michael Green on the case of the chairman of a $22bn state retirement fund. It would be dull as dishwater to watch interviews where the real tensions in the ideas expressed are not brought out, and hypotheses for testing views stated posed. I thought this interview was a brilliant balance of that. It takes real skill for that balancing act on Green's part. Marc Levine may have been mismatched but he is a finance guy of decades experience and it's fine for him to be put on the spot, imo.
  • TE
    Tim E.
    30 March 2018 @ 13:05
    Passive makes zero sense. There is no such thing as a free lunch, or "free ride." Investing based on a market cap-weighted (or float-weighted, as Mike correctly points out) index, with the constituents decided somewhat arbitrarily by index gatekeepers is like picking a basket ball team purely based on the height of the potential team members and discounting all other factors that make a good basket ball player. Passive, index-driven investment allocation represents a classic Soros-style reflexivity trade. When it gets far enough away from equilibrium and becomes unstable, the reversion to the mean is going to be devastating for a lot of people's portfolios. And make no mistake; it will vastly overshoot in the other direction, too.
    • GB
      Gold B.
      5 May 2018 @ 01:53
      "And make no mistake; it will vastly overshoot in the other direction, too." <- word up. That's where we clever RVers come in and clean up.
  • VS
    Valeriy S.
    17 April 2018 @ 14:04
    After watching this as a trader all I want is to go long Michael Green and short Marc Levine :D
    • GB
      Gold B.
      5 May 2018 @ 01:51
      Yeah, same. I found this just brutal in its subtlety. I don't think anyone here could be under the illusion that Levine made more sense. At the same time, what's he meant to do? Something about dancing until the music stops comes to mind.
  • GB
    Gold B.
    5 May 2018 @ 01:41
    This is brilliant!!!
  • cb
    chris b.
    2 May 2018 @ 05:55
    Marc Levine ...paraphrased .. "I am so incredibly incapable of doing my job ..and so in way over my head.. I've adopted this system that makes me look credible.. and gives me something to blame when it blows up" .. you can't help but think he is representative of systematic risk with absurd expectations ..7% yearly..and hoping to luck into a decent track record on Central Bank largess
  • MC
    Mario C.
    23 April 2018 @ 13:19
    Love Michael Green interviews, whoever the interviewee is. Besides his interview style seems even to have improved, being a touch more passive and only interrupting the interviewee to correct him or have him clarify or develop his viewpoint. This interview quality seems to be underrated by RVTV crowd, one of interesting points being the strong disagreements between both Michael (MG looked pretty red face tensed - nervosity from disagreement? - while listening to ML talk)
  • RX
    Robert X.
    15 April 2018 @ 11:07
    Price insensitive strategies may make sense for a portion of a pension plan to help manage fees, but mistaking low cost beta an actual portfolio management strategy is insane in the long run. You are making the bet that the market's ponzi scheme of Vanguard and Larry Fink, which was built on QE as much as the failings of active manager, continues without end. We are at the beginning of a new volatility regime, active managers should/will likely earn their keep, at least relative to passive strategies.
  • MC
    M C.
    12 April 2018 @ 17:40
    Finally someone who is able to articulate the benefits of passive investing and is employing these methods in a large scale public portfolio. Marc absolutely gets it right. The endowment and pension world are littered with failed portfolios who could absolutely have benefited from Marc's philosophical stance on allocations to public equities. Fees, fees and more fees. The lower one pays the higher the probability of success - that's it.
  • TT
    Trenton T.
    5 April 2018 @ 02:55
    It was pointed out that RMBS was created to feed a machine. Likewise, index funds have been created to feed this generation's retirement machine, whether pension, 401 (k), IRA or after tax savings. Look for a similar result. If my pension fund owns a publicly traded insurance company, am I really invested in equity? Mezzanine? Senior secured (where Marc actively made his money)? The answer is YES. Until an index is created that disaggregates the capital in the equities market and reconstitutes it by the real character of the underlying for asset allocation purposes, diversification by that method is a farce. The dynamism of the market itself will be passive's undoing.
  • VD
    Vincent D. | Contributor
    28 March 2018 @ 22:37
    I appreciate that RealVision is showing the other side of the debate and let speakers build a case against its client base (active managers and global macro funds). That being said, Marc Levine mostly sticks to generalities and is not the bets person to make the case for passive. M. Green comes off as smarter than his guest (did I see a few yawns?) He should be interviewing more technical / sophisticated / controversial clients
  • GS
    Greg S.
    28 March 2018 @ 00:51
    If there was a way to short the Illinois pension system I would after hearing that interview. More Beta in an overvalued market when liquidity is being withdrawn is going to kill them. More PE just means they have a liquidity mismatch. Also funny the guy says 2/20 is too expensive when PE has an even worse fee structure.
  • NH
    Neil H.
    27 March 2018 @ 16:49
    herb stein said that everything goes up until it doesn't. Since 1981 both equities and fixed income have been in a bull market. now that we are at a 500 year low in interest rates how will these asset classes combine to produce a 7% return over the next 10 years. Who will bail out Illinois when the pension fund blows up?
  • JH
    John H.
    26 March 2018 @ 23:52
    Oh man, this guy? His WSJ editorial "rang the bell" for a reversal of 60/40 versus absolute value/HF returns. Dude, HF's are essentially zero-duration enhanced cash. If your pension fund was holding cash or "enhanced cash" (i.e. HFs) during the biggest bull market of our lifetimes, then your pension fund trustees were making an allocation mistake. HFs were more or less doing what they were supposed to, making some spread to cash from somewhat orthogonal strategies. I mean, it's like blaming money market funds for only making the returns of commercial paper and not equity returns. If you want equity returns, buy equities. The funny thing is that the more guys like this rip on hedge funds, the more HFs will feel compelled to add beta and not deliver the return profile they're supposed to when stocks invariably have a bear market. Anyway, this guy is your contrary indicator to start selling equity index funds and buying merger arbitrage funds, IMO.
  • DL
    Dan L.
    26 March 2018 @ 20:33
    This is fantastic. Marc Levine is such a smart guy and I really look up to him given his background from accounting to high finance. Although, I see the passive investing argument begin to break down given our current circumstance (i.e. market at all time highs) when he attempts to answer Michael Green's passive correlation question at the 12:00 mark. Particularly, when Marc says "we're investing in a all the same stocks that everyone else is." Given the "long-term" picture of the market, it doesn't necessarily protect your pension holders/retirees that need to harvest their retirement money when the market corrects (because in that case it will cause the same or worse correlation to the downside [as the Beta works both ways]). You end up with a situation where the correlation is so high it drives the market parabolic which causes a certain "group" of individuals to get left holding the bag on the 'high Beta driven' downside correction which tends to happen in dramatic and quicker fashion than uptrend building/passive management does. I believe this will be an endless debate point between active and passive management that goes on beyond our lifetime...
  • DS
    David S.
    26 March 2018 @ 20:29
    I always enjoy Michael Green's interviews. He thinks through the assumptions and the analysis at hand. This helps me understand the discussion much better. Thanks. DLS
  • DS
    David S.
    26 March 2018 @ 20:23
    Michael is a gentleman and a scholar. He is always trying to learn and rethink his positions during - and I am sure after - the interview. Marc is an experienced man and may be overselling indexation. Many of his assumptions like poor performance of hedge funds are real, but the solution may not be to way overweight index funds. I do not know the answer either, but the interplay on the interview is productive for me. DLS
  • DB
    David B.
    26 March 2018 @ 18:29
    This gentleman is too confident that his pension fund can ride out the volatility. His premise is that a decline in equity values will recover is short order like they did following the 2000 and 2008 bubbles. What if they don't recover for 10 years? Hubris is killer.
    • DS
      David S.
      26 March 2018 @ 20:11
      I agree but think it may be even worse. What if the indexes do not recover for 30 years? Look at the chart of the S&P since 1950. We have had massive P/E inflation with all the QE, pension funds, sovereign wealth funds and stock buybacks. Look at the simple regression line. To bet almost all on index funds could result in the increasing the 25% contributions per year to a higher percentage as the wealthy flee. These are defined pension funds, i.e., no discretion on payouts. This sounds a little like housing prices will always go up. I hope he is buying long-term protection when volatility is low. DLS
  • RA
    Richard A.
    26 March 2018 @ 17:32
    Always enjoy Mike Green interviews. The best part was Mike's passive investing correlation comment around the 39 minute mark, to which Marc responded, "I completely disagree ..." and then went on to NOT address the comment in any way, shape or form, but just repeat things he had already said.
  • BS
    Buy100oz S.
    26 March 2018 @ 17:10
    Marc Levine is probably making a mistake in his 7% assumption. Both Warren buffett and Ray Dalio have been on record recently that the future level of equity returns will be a lot lower closer to 4%. You can easily beat that if you are a smart small/mid cap stock picker or find the right small/mid cap fund manager, but passive management in stocks the way Marc Levine is involved looking forwards is more likely to disappoint then surprise to the upside.
  • RA
    Robert A.
    26 March 2018 @ 17:06
    I guess I had better add that although the Guest’s views were articulated succinctly, they might have come out of Wylie Coyote’s mouth. The return assumption doesn’t work and the Tax base is leaving. These Pension underfundings are simply going to come down to three parties fighting over a Pie that won’t/can’t feed everyone. The retired pensioners, the Bond holders and the current workers that have to keep the streetlights on and the pot holes filled. Each Party has a perfect and reasonable legal argument as to why THEIR promise should not be cut, but eventually the conflict between the three interested parties and the Taxpayers must come to a head as the situation is unsustainable without Federal taxpayer bailouts.....which politically seems like where it is all headed. Going to need some extra large fast Printing presses, IMO.
  • V!
    Volatimothy !.
    26 March 2018 @ 16:13
    Great resolve Mr. Green. I don't think I would have been so professional. I think Mark Twain summed up Mr. Levine's theories well when he said "all you need is ignorance and confidence and the success is sure.
  • DT
    Dave T.
    26 March 2018 @ 12:59
    This was more interesting for the body language than the interview, although Levine clearly was out of his depth with Michael Green. I was switching from the interview to an NLP eye accessing chart and came to my own conclusions.
  • NI
    Nate I.
    26 March 2018 @ 06:16
    I always enjoy the Michael Green interviews. Very smart guy who is well worth listening to. Moreover, I was thankful to Milton for removing the Gawd awful blaring music (and I use that word loosely) of late so I could actually listen to this interview. Levine clearly has a bright future in politics. Maybe he can run a central bank someday. 7% was a tough nut even when P/Es were much lower. It was ironic how Levine cited Buffett as his indexing justification (which I tend to agree with in some ways for investors with an infinite time horizon, provided you behave like an owner, hold your own shares, and vote them responsibly), yet he chose to ignore Buffett's long standing decree that 6% is the best you can do in a pension fund. Michael should have made Levine squirm a little more, but I suppose RV can't be too harsh on its guests :-)
  • LC
    Liliana C.
    26 March 2018 @ 05:00
    Well played Michael! You’ll revisit after shit hits the fan and Illinois is out of time. Does Levine genuinely believe that funding at this grotesque level or even higher levels will continue in perpe
  • LC
    Liliana C.
    26 March 2018 @ 04:55
    Michael delicately and step by step made very clear points, yet Levine couldn’t put 2 2 together? Why? Arrogance? Ego? The board has limited resources and time? What kind of bull shit is that!?! Bril
  • LK
    Lisa K.
    23 March 2018 @ 19:24
    State pensions are in trouble with guys like him. Can he not understand that the next bear market will have people avoiding stockmarket for decades. How come we don't hear of any pensions investing in bitcoin? That is the Hail Mary pass they need. I can see a state with a solid fiscal governance attracting all new residents exiting from irresponsible states.
    • SR
      Steve R.
      23 March 2018 @ 21:51
      "Pensions investing in bitcoin" - WTF! Are you on drugs or something?
    • JM
      John M.
      24 March 2018 @ 03:51
      I think an allocation to gold might be a good investment for pensions.
    • sm
      stephen m.
      26 March 2018 @ 02:24
      Avoiding the markets for decades is what was said in 2009 and turned into the buying opportunity of a lifetime. Capital needs to go somewhere
  • PS
    Paul S.
    26 March 2018 @ 01:54
    PE expansion is a helluva drug
  • JH
    Jesse H.
    25 March 2018 @ 23:28
    Robert - could not agree more. That was the word going through my mind as I listened to this (i.e. clueless). Mike was a gentleman and a scholar, as always.
  • RS
    Robert S.
    25 March 2018 @ 20:53
    Kudos to you Mike Green for staying so calm while listening to this completely clueless guy. Although, you probably will not talk to him again since he might be fired when index funds have to switch into reverse ;-)
  • JH
    Jesse H.
    25 March 2018 @ 15:36 smart as Mike Green, you waste an opportunity for significant learning. A 7% discount rate in my view borders on the absurd in an essentially ZIRP world in the US.
  • JH
    Jesse H.
    25 March 2018 @ 15:30
    Good interview and always enjoy watching / listening to Mike Green. Surprised by what I would consider the relative myopia, dismissiveness and naivete of the interviewee. If you don’t listen to a man
  • JP
    Jonathan P.
    25 March 2018 @ 14:41
    At times a bit frustrating to watch (as a former Illinois resident), but as a whole it was great to see more disagreement than in typical RV interviews. Michael and Marc each articulated their positions thoughtfully and concisely.
  • SL
    Stephen L.
    25 March 2018 @ 10:14
    That was a great discussion, thank you! Its great to get such opposite views with two great guests. In a future episode it may be good to get Michael Green to interview Michael Green - hes brilliant.
  • TH
    Timo H.
    25 March 2018 @ 10:08
    "Madness is rare in individuals - but in groups, parties, nations, and ages it is the rule." - Friedrich Nietzsche This interview made me happy that I'm not in any way related to Illinois Pension System. Ever cheapening and eventually free money has made geniuses look morons and morons look geniuses. Now that the tide is probably turning, morons will look morons again and passive investing will suffer from its lack of a capital preservation plan, should the crowd panic. The profitability of passive investing is the result of herd behavior combined with ever easing money. It is worthwhile to remember, that such herd may turn 180 degrees very quickly, should the monetary conditions change. Mike did an excellent job as the interviewer.
  • RP
    Ryan P.
    25 March 2018 @ 03:33
    Mikes questions were better than the responses.
  • RO
    Robert O.
    25 March 2018 @ 03:20
    Marc is fortunate now to have Illinois taxes to back up the pension plan; but 25% of the Illinois budget seems more than excessive. Back at the top of the dot-com bubble CA was taking in a huge amount of new tax revenue (state income tax) and the legislators funded every program they could find. When the crash came the top 1% to 2% of the tax payers disappeared (they didn't go away they just stopped making very large incomes); unfortunately about 20% of the CA budget relied on these few taxpayer. The new programs were not cut and CA started going into the red. Now if the recently signed US government bill accelerates the rise in US interest rates and equity markets sell off fast, we may find out soon enough if the index ETFs will add fuel to equity conflagration on the way down. The second order effects will be on the wealth of the Illinois taxpayers who are currently fundings Marc's pension plan. Illinois may relive CA's experience with taxpayer disappearance. Maybe Feb 2019 would be a good time to bring Marc back if these event come to pass later this year.
  • KS
    Kathleen S.
    24 March 2018 @ 13:10
    Just listening to this guy, Pension Funds are doomed, I don't have one, but if I did - I wouldn't count on it being there.
    • DR
      Daniel R.
      24 March 2018 @ 20:48
      That's what I thought at first. Then I thought what else should he be doing? To Michael's first question - why sign up for this gig. Seems to be a set up to fail - given an underfunded pension with a remit to make it whole and return 6% pa. Yes you could try and actively manage the whole thing, but look how poorly these once rockstar hedgefund managers have done of late. Not a job I'd ever want.
  • HH
    Henri H.
    24 March 2018 @ 19:41
    Michael Greene interviews are always fantastic!
  • BD
    Bruce D.
    24 March 2018 @ 17:21
    Thanks Milton, as it's Excellent having Michael Green back, but what I found fascinating is that we are now at a time when all 4 major asset classes are potentially all reversing at the same time, and there was no discussion of asset allocation thinking globally??? A portfolio of 80-90% S&P indexing is going to get you spanked in the next bear market! I would think that the time is NOW to be allocating to other assets, (gold, emerging market equities, commodities, MLP's for income) especially after the greatest outperformance that the S&P has ever had in the last 8 years. I would think that the #1 job of managing a pension is not just beating the index over time, but realizing when it's time to preserve capital for the next generation, especially in Illinois where people are leaving, and the pension system requires 25% of the State budget just to survive.....what happens when that 7% yearly goal gets trashed over the next decade? There is no way that allocation comes anywhere near 7% consistently over time. It's time for pension allocators to star thinking outside the box, and not on the S&P. While I admire Levine for trying to fix this ridiculous problem we have with the pension system, I'd be more comfortable if he was looking for distressed opportunities like he mastered in his old job. Thank goodness I'm not dependent on the pension system for my retirement, as you may get the dollar amount you think you deserve, (like in social security), but the expected long term buying power of that cash flow will be insufficient over time to maintain your lifestyle.
  • BP
    Besar P.
    24 March 2018 @ 14:30
    Passive indexing works as long as the market is efficient. But markets are not always efficent, especially the less active managers in it. If you look at the Nikkei index crash in 1989, it would take a lifetime to get back to even. It just shows that indexing can fail too.
  • BP
    Besar P.
    24 March 2018 @ 14:14
  • PU
    Peter U.
    23 March 2018 @ 10:13
    With Michael Green in the title, I don't even have to watch it to give it a thumbs up!
    • PU
      Peter U.
      24 March 2018 @ 09:10
      After reviewing the entire video, I am underwhelmed
  • DR
    Daniel R.
    24 March 2018 @ 06:14
    Fantastic interview - great to see two really smart people taking opposite sides of an issue and really locking horns rather than talking past each other. Michael Green is fantastic - always. I hope you can find more time for him. Marc Levine was pretty compelling, but ultimately he didn't address (to my ears) Michael's point that if correlation among the S&P has increased substantially in the age of passive investing, then so has risk. Maybe Marc is right that over the time horizon of these pension funds it won't matter since equities go up long term - but at some point when the tail become big enough it'll wag the dog. The function of markets to allocate capital effectively between competing enterprises is breaking before our eyes.
  • MH
    Matthew H.
    24 March 2018 @ 03:21
    Mike Green may easily be one of the most valuable speakers on this platform. His interviews of other people are always incredibly thought provoking, especially when bringing things back to bigger picture market mechanics/structure, demographic shifts, and really rendering down/framing an investment thesis in its most raw/true expression of what the investment represents. His translation of complex topics into easily understandable concepts never goes without notice either and is very valuable. It feels like it has been a while since Mike was the interviewee on RV, it would be really interesting to turn the floor over to him and hear the latest on what he has been involved with/looking at over the past little while.
    • DR
      Daniel R.
      24 March 2018 @ 05:51
      Agreed - I'd feared they'd dropped Mike from the interviewer roster. He's my absolutely favorite on RVTV.
  • hb
    henry b.
    24 March 2018 @ 05:29
    Must echo the other comments ----- it's great to have Mike Green back on RVTV for a discussion on one of his favourite subjects. Those of us who are original subscribers fondly remember his technology discussions which are sadlly missed. Henry B
  • FG
    Fred G.
    24 March 2018 @ 03:59
    Some interesting points once Marc stopped talking about his accomplishments. Mike Green is an excellent interviewer, great to have him back. Would have liked more discussion around the pension issues in general and also the role of state or federal authorities if there was to be any pension crisis. Illinois is in real trouble (as are a lot of city/soveriegn states around the world). Given rising rates and the extreme indebtedness of the state it does not seem feasable that they can continue to fund 25% towards the pension long term. It would seem that the pension fund needs a lot more than returns from passive equity investing to overcome their projected increasing future payouts and probable inabiltiy of the state to keep funding. Only way out of the situation other than significantly higher pension fund returns is a much lower payout to retirees or a federal bailout eventually. I sense some trouble ahead for public pensions. Look forward to the next Mike Green interview.
  • YB
    Yuriy B.
    24 March 2018 @ 01:51
    Fantastic interview: an opportunity to see 2 intelligent, highly informed people debate 2 sides of important issues. Well done!
  • PI
    Private I.
    24 March 2018 @ 00:55
    I am very pleased to have Mike Green back. In another thread someone recently commented that “Raouls biggest problem is that he generally holds more intriguing views than his guests.” In my opinion having intriguing views is an excellent “problem” to have. In fact, when I consider the best of the RVTV “interviewers” all of them have their own intriguing ideas that influence the conversation/discussion (which often at its best is not merely an interview). Along with Raoul, I am thinking of Grant Williams, Jim Grant, and definitely Mike Green. (I actually thought that with some more experience, Tommy Thornton might pull it off.) What in my opinion will not work as an interlocutor (a much better word than interviewer for what is needed here) is a highly skilled interviewer who does not have their own relevant intriguing views informed by hands-on life experience – such results in an experience that while technically proficient and well done, simply is not what I want/expect from RVTV.
  • MR
    Marten R.
    24 March 2018 @ 00:29
    Very interesting. The last 5 mins of the discussion is very important along with the concept of the permanency of investment capital. When money itself is corrupted there are seemingly no end to the distortions in markets and price discovery. Where's the risk? What's it worth?.... ? .... If a pension plan is deploying capital, over a long period of time, which will be permanently invested (for all intents and purposes), it is less price and volatility sensitive than other buyers in the markets, and it is only EVER a buyer. Other (equity) market participants are both buyers and sellers and have capital which chases the highest risk adjusted returns in equity and across other markets. (so its time in the market is temporary)... So... we have this dichotomy of participant incentives. Without this passive phenomenon distorting capital flows... to quote the great man 'in the short term the market is a voting machine, in the long term the market is a weighing machine'.... meaning, eventually, price will equal intrinsic value. Passive flows seem to be extending the period of time that the market spends as a voting machine. At the moment liquidity inflows mean that the 'votes' translate to ridiculous high equity prices and gross distortions. When liquidity flows the other way, equity prices will still be ridiculous and the distortions gross, but to the extreme downside. This should happen even more quickly on the way down than it did on the way up. .... But then, will we will reach a point where the lack of flows / liquidity suppress price rather than elevate it? Who knows.... but I think the return of volatility over the last few months are just the 'pre shocks' to very large liquidity driven earthquakes which will strike all markets across the everything bubble. The opportunity is there, for anyone paying attention... to think hard about, and manage risk. Return of capital, rather than return on capital, should be everyones top priority over this next year. MR
  • FC
    Fractal C.
    23 March 2018 @ 13:08
    With all due respect, this does not make sense. Mr Levine, it is your JOB to separate 93% active managers who under perform from the 7% who outperform the market. Illinois pension funds are in a crisis with about 50% under funding - you better think out of the box rather than follow the passive investing group think.
    • EM
      Elvijs M.
      24 March 2018 @ 00:02
      Well, to his point is that these 7% of wining managers can't be foreseen. Call it fooled by randomness or hot hand fallacy if you will - where in the same way you could find 7 % of the players would be winning after 15 rounds of playing roulette, some of the managers will become winers in benchmarking the index after 15 years. Persistence here would be the key and yesterdays winners have low correlation with tomorrows. I think this is a very fascinating question and one that strikes in the heart of finance where both the academia and professional world have very contrasting views. The difficulty is that it is hard to know without looking in the rearview mirror and to get a high p-value you need a big sample (timeframe). My view is that it was much more easier for hedge funds to generate alpha in the 70s, 80s,90s then it is today and that is not because todays hedge funds has become inferior – on the contrary it think with today big data and computing power that posses have made them so dam'n good at their job that they almost have become efficient in doing it.
  • TR
    Thomas R.
    23 March 2018 @ 22:24
    I agree with the various comments below that this was a great interview. To have access into the mind-set of passive investing was very useful. My own assessment of the markets in the last 20 or so years, with the benefit of hindsight, is my own dramatic underestimation of the power of QE in the past decade at least, providing a constant underlying BID in the market and that BID, in all likelihood being "Indexed" by nature, is the likely root or cause of the increasing move to indexing, and with more indexing it has fed on itself creating what has been a vortex type phenomenon, providing the pressure for active managers to compete, especially, as Michael pointed out, with such a low interest rate/cost of capital environment. We appear to be in a changing environment of a reversal of interest rates and with such high levels of public and private debt, how equities and "discounted future profits and cash flows" will be discounted may open up the opportunity for true alpha again. It's tough to argue with Mr Levine's logic with a time horizon of 1987 to 2017. The interesting piece is that 30 years is actually a blip on the screen. What I love about Real Vision is the unanswerable inquiry into what 2017 to 2047 might look like. We simply gather the data, make our best bets, attempt to hedge risk, and continually attempt to answer the question, Am I wrong or am I early? This is such a great way to spend a Friday evening after a long week!
  • HJ
    Harry J.
    23 March 2018 @ 22:15
    Ah Mikes back! Glad, nice to see relevant questions return. Best questions and thinking on RVTV.... Thank you Mike.
  • WM
    Will M.
    23 March 2018 @ 19:50
    Discount rate of 7%!!! The Illinois pension system is already in the toilet and already taking a huge portion of state funding! The constitution says they can't cut the ridiculous promises made to the powerful union system in that corrupt state. It is clear the state is in a terrible financial state with little ability to manage its problems. California is in about the same position. I uptick this video because its a good example of the problems building up in the pension system and the challenges managing the problem. It just felt that Michael Green was pointing out facts and Marc Levine was on the defensive on a couple of occasions. I wish Marc and his team well, they so have their backs against the wall and a major stock market correction will clearly show the Illinois pension system is in deep trouble and the State will not be able to escape its constitutional pensions straightjacket without declaring bankruptcy. Good video.
  • RM
    Ron M.
    23 March 2018 @ 18:40
    “The biggest challenge after success is shutting up about it.” ― Criss Jami
  • AM
    Alonso M.
    23 March 2018 @ 17:08
    I normally don't write to rant, but this one deserves it. The most valuable part of this interview was with about 4 minutes left when Michael Green politely tells Marc he is making a factually incorrect statement. The other interesting part was at about 26 minutes left where if you look at Marc's facial expression while he answers the question, you can tell he is not being truthful. His eyes are closed for a very long time, and he kind of nods while disagreeing with Michael. Two classic tells that he doesn't actually believe his own response to the question. Many other things bugged me about the interviewee. For example, with about 7 1/2 minutes left Michael alludes to the 'data being very clear', meaning one cannot argue with it. I would have thought Marc would have agreed with this statement since he says he embraces a data being very clear type argument in support of passive indexing. Yet Marc disagrees because he "thinks you have the wrong correlations" and proceeds to provide a response that is extremely subjective. Total nonsense. Bottom line for me is passive indexing is one of many investment styles. If you have 80% of your capital tied to it, you are not diversified by investment style.
  • CY
    C Y.
    23 March 2018 @ 14:36
    "they take a free ride on all the votes". What he fails to realize is that we've never actually seen the outcome where indexing becomes the dominant market force. So what happens when their are no free "votes" left to ride on? They are going to get a rough lesson on feedback loops.
    • TF
      Tom F.
      23 March 2018 @ 16:45
      I cannot agree more. Feedback loop lifting bad companies on the way up and another one bringing down all the good ones on the way down.
  • BP
    Brian P. | Real Vision
    23 March 2018 @ 16:34
    Fantastic insightful interview. Refreshing to see two adults with differing points of view have a civil debate and end things with a handshake and an agreement to speak again. Eager to see what's to come in the next year.
  • GS
    George S.
    23 March 2018 @ 16:33
  • DR
    David R.
    23 March 2018 @ 15:16
    Great interview! Interesting to hear Levine's attempt to reason with frustrations existing in the current market environment. His triumph towards passive is not all that original.. seems like he is fully taken by group think.
  • LK
    Lyle K.
    23 March 2018 @ 11:18
    “Market timing for losers” I don’t agree with that statement considering that all money made in the market is buying and selling the right assets at the right time.
    • EM
      Elvijs M.
      23 March 2018 @ 15:04
      I would be in the camp where I do agree with that statement in general. Rebuttal:
  • AH
    Andrew H.
    23 March 2018 @ 15:02
    Most of Marc's analysis seems to make sense after many years of central bank support and through a lowering interest rate environment. I suspect that the math and conclusions will change dramatically if the feds lose control of the markets. Conversely he could remain correct if we see larger central bank intervention(direct purchases of stocks, bonds, etc...) over the coming years.
  • DT
    Daniel T.
    23 March 2018 @ 14:16
    Very interesting interview! But: This guys hindsight bias scares me to death...
  • CY
    C Y.
    23 March 2018 @ 13:42
    I think Marc scores one point with focusing on active as it pertains to cost but misses the forest for the trees in not realizing that he's built a portfolio of one way bets. He looks brilliant today but it would be interesting to revisit this conversation in 5 years.
  • KJ
    Keith J.
    23 March 2018 @ 13:20
    Audio available straight away - not sure if this is a result of my previous comments or a coincidence but thank you RV!
  • MT
    Michael T.
    23 March 2018 @ 12:52
    Great interview, Michael! I wonder if Marc will in fact be back for the next interview.
  • JD
    Jonnathan D.
    23 March 2018 @ 12:43
    Notice Marc doesn't directly debate Michael's points... politicians...
  • GF
    George F.
    23 March 2018 @ 12:12
    The volume on your videos should be higher.