Warren Buffet backs index trackers
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 into the rich for being suckered by Wall Street 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.”
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 Morningstar data.
Buffett, 86, has been making his point for more than a decade, most visibly through his $1 mil- lion 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 about 60% of the hedge funds gains during that period were eaten up by management fees.
Buffett will almost certainly win the wager when it ends on December 31. – Bloomberg