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

The Economic Times - - Disruption: Startups & Tech -

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.

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