22 May 2019
Warren Buffett advised investors to stick to low-cost index funds. Photo: Bloomberg
Warren Buffett advised investors to stick to low-cost index funds. Photo: Bloomberg

Buffett: Wall St wasted US$100 bln in bid for outperformance

Billionaire Warren Buffett slammed Wall Street hedge funds and financial advisers, saying their search for outperformance has caused investors to “waste” more than US$100 billion over the past decade.

“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,” Reuters quoted the 86-year-old Buffett as saying in his annual letter to shareholders.

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

Buffett, who used his investment savvy to build Berkshire Hathaway Inc. into a powerhouse conglomerate and become the world’s second-richest person, called Vanguard Group founder Jack Bogle “a hero” for his early efforts to popularize index funds.

Berkshire itself has done far better, with its stock price gaining 20.8 percent per year since Buffett took over in 1965, dwarfing the Standard & Poor’s 500′s 9.7 percent gain, including dividends.

Yet Buffett said 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 to his wife Astrid 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 US$1 million that a Vanguard S&P 500 index fund would outperform several groups of hedge funds over years.

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 he has “no doubt” he will win the bet. He plans to donate the money to Girls Inc. of Omaha.

While Buffett said no pension funds or “mega-rich individuals” have taken his advice on index funds and that “human behavior won’t change”, some investors are following his lead.

Despite a roaring stock market in the United States, actively managed mutual funds bled US$342 billion last year, their second straight year of outflows.

Passive index funds and exchange-traded funds, meanwhile, attracted nearly US$506 billion of new money.

However, index funds are not risk-free.  Tim Armour, chief executive of Capital Group Cos., which runs the American Funds and invests US$1.4 trillion, said index funds can expose investors to losses when markets turn sour. The funds are one of Berkshire’s biggest investors.

“We don’t dispute the data that has led Mr. Buffett and others to form their views,” Armour said in a statement.

“However, a fairly simple fact has gotten lost in the debate. Simply put, not all investment managers are average.”

Berkshire, meanwhile, said fourth-quarter profit rose 15 percent from a year earlier, as gains from investments and derivatives offset lower profit from the BNSF railroad and other units.

Berkshire also owns dozens of stocks including Apple Inc., Coca-Cola Co., Wells Fargo & Co., four of the biggest US airlines, and more than one-fourth of Kraft Heinz Co.

This year’s letter and Berkshire’s annual report gave no clues about who will succeed Buffett as chief executive officer, a question shareholders and Wall Street have speculated about increasingly in recent years.

But Buffett lavishly praised Berkshire executive Ajit Jain, widely considered a leading CEO candidate, for smoothly running much of the conglomerate’s insurance businesses.

Jain joined Berkshire in 1986, and Buffett put him in charge of National Indemnity’s small, struggling reinsurance operation.

Since then, Jain has “created tens of billions of value for Berkshire shareholders”, Buffet said.

“If there were ever to be another Ajit and you could swap me for him, don’t hesitate. Make the trade!”

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