Warren Buffett rails against fee-hungry Wall Street managers

NEW YORK: Billionaire Warren Buffett, whose stock picks over several decades have turned Berkshire Hathaway Inc. into one of the most successful conglomerates, delivered another black eye to the investment industry on Saturday, saying investors should “stick with low-cost index funds.”

“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,” Buffett, widely considered one of the world’s best investors, said in his annual letter to shareholders.

“Both large and small investors should stick with low-cost index funds.”

Buffett, whose annual letter is scrutinized by investors who consider him “the Oracle of Omaha,” estimated that the search for outperformance has caused investors to “waste” more than $100 billion over the past decade.

On Saturday, he called Vanguard Group founder Jack Bogle “a hero” for his early efforts to popularize index funds.

His own Berkshire Hathaway gained 20.8 percent per year from 1965 to 2016, compared to the S&P (Standard and Poor’s) 500’s 9.7 percent gain, the company said.

Yet Buffett has often said he believes most stock investors are better off with low-cost index funds than paying higher fees to managers who often underperform.

In 2014, Buffett said he plans to put 90 percent of the money he leaves his wife when he dies into an S&P 500 index fund and 10 percent in government bonds.

During the financial crisis, Buffett bet a founder of the asset management company Protege Partners LLC $1 million that a Vanguard S&P 500 stock index fund would outperform several groups of hedge funds of over the 10 years through 2017. The index fund is up 85.4 percent, Buffett said, while the hedge fund groups are up between 2.9 percent and 62.8 percent.

On Saturday, Buffett said the figures leave “no doubt” that he will win the bet. He plans to donate the money to Girls Inc. of Omaha, a charity.

It looks like some investors are following Buffett’s advice. Despite a roaring stock market in the US, actively managed mutual funds bled $342 billion last year, their second straight year of losses. Passive index funds and exchangetraded funds attracted nearly $506 billion.

But Tim Armor, CEO of Capital Group Cos Inc, said index funds can expose investors to losses when markets turn sour. Capital, the active manager behind American Funds, is a top shareholder in Berkshire and oversees $1.4 trillion altogether.

“It’s important to say that we don’t dispute the data that has led Mr. Buffett and others to form their views,” Armor said in a statement.