Tags: warren buffett | berkshire | investment fees | jack bogle

Buffett: $100 Billion Has Been Wasted on Investment Fees

Buffett: $100 Billion Has Been Wasted on Investment Fees

Saturday, 25 February 2017 10:01 AM

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 Inc. 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 $100 billion over the past ten 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.

Read Warren Buffett’s annual letter here.

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. Proceeds will go to charity.

On Saturday, he gave an update: The bundle of hedge funds had compound annual returns of 2.2 percent in the nine years through 2016, compared with 7.7 percent for the index fund. Barring a market crash, Buffett will almost certainly win the wager when it ends on Dec. 31.

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.

“In his early years, Jack was frequently mocked by the investment-management industry,” Buffett wrote. “Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me.”

Buffett’s remarks on indexing have been jarring for many of his followers, not least because he has spent a career finding ways to generate market-beating returns at Berkshire. The billionaire threw a bone to that crowd in his letter, reiterating his stance that it’s not impossible to beat the index.

Ten, tops

“There are, of course, some skilled individuals who are highly likely to out-perform the S&P over long stretches,” he wrote. “In my lifetime, though, I’ve identified -- early on -- only ten or so professionals that I expected would accomplish this feat.”

He also sought to distinguish between investment fees that money managers charge and the kinds of fees that Wall Street banks earn for helping to arrange deals.

“Berkshire loves to pay fees -- even outrageous fees -- to investment bankers who bring us acquisitions,” he wrote. “To get biblical (Ephesians 3:18), I know the height and the depth and the length and the breadth of the energy flowing from that simple four-letter word -- fees -- when it is spoken to Wall Street. And when that energy delivers value to Berkshire, I will cheerfully write a big check.”

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Warren Buffett deepened his critique of money managers and investment consultants, saying the rich are going to continue to get fleeced by Wall Street fees and that the system has wasted $100 billion over the last decade.
warren buffett, berkshire, investment fees, jack bogle
Saturday, 25 February 2017 10:01 AM
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