Buffett says $100 b Wasted Trying to Beat the Market
Investment managers, not clients, reap rewards; indexing pioneer Jack Bogle a ‘hero’ for bringing real value to American investors
New York: Billionaire investor Warren Buffett devoted a substantial portion of his annual letter to deepen his long-running critique of investment fees.
Over five pages, he updated Berkshire Hathaway shareholders on a bet made almost a decade ago that a low-cost fund that passively tracked the S&P 500 Index would outperform a basket of hedge funds. He also laid anew into the rich for being suckered by Wall Street investment advice, which he estimated has wasted more than $100 billion over the past 10 years.
“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he wrote. “Both large and small investors should stick with low-cost index funds.”
While Buffett was doubtful that the wealthy would take his advice, his argument has gained steam. After years of underperformance, hedge funds are facing a revolt by endowments, pension funds and other institutional investors that have decided they aren’t getting their money’s worth. Meanwhile, index funds have been on a tear. In 2016, passive strategies attracted $504.8 billion in new money, while active managers saw $340.1 billion in redemptions, according to data from Morningstar Inc.
Buffett, 86, has been making his point for more than a decade, most visibly through his $1 million bet with Protege Partners. The billionaire challenged the asset manager to pick a group of hedge funds that it thought would beat an S&P 500 Index fund over 10 years.
On Saturday, he gave an update: The bundle of hedge funds had compound annual returns of 2.2% in the nine years through 2016, compared with 7.1% for the index fund. The billionaire estimated that about 60% of the gains that the hedge funds produced during that period were eaten up by management fees.
“That was their misbegotten reward for accomplishing something far short of what their many hundreds of limited partners could have effortlessly — and with virtually no cost — achieved on their own,” he wrote.Buffett will almost certainly win the wager when it ends on December 31. Proceeds will go to charity.
He also praised Jack Bogle, the 87-year-old founder of Vanguard Group. The pioneer of indexing was once an outcast in the investment world as he eschewed riches to provide real value to American investors, Buffett wrote.