Buffett stings hedge funds anew in annual letter

SEATTLE • Billionaire investor Warren Buffett devoted a substantial portion of his annual letter to deepen his long-running critique of investment fees, as his Berkshire Hathaway reported a higher quarterly profit though operating income fell.

Mr Buffett, whose stock picks over several decades have enriched generations of Berkshire shareholders, also delivered a black eye to the investment industry in his annual letter, urging ordinary investors to buy plain-vanilla index funds.

The sweeping endorsement of index investing is sure to sting the hedge-fund industry and encourage the stampede into assets that passively track the market.

In his well-read annual letter to Berkshire Hathaway shareholders last Saturday, Mr Buffett estimated that investors wasted more than US$100 billion (S$140.6 billion) on high-fee Wall Street money managers over the past 10 years.

He declared an early victory in his decade-long bet that a basket of hedge funds would fail to keep pace with an S&P 500 Index fund.

"The bottom line: 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," Mr Buffett wrote. "Both large and small investors should stick with low-cost index funds."

The message is already catching on. After years of underperformance, hedge funds are facing a revolt by endowments, pensions and other institutional investors that have decided they are not getting their money's worth. Meanwhile, index funds have been on a tear.

Last year, passive strategies attracted US$504.8 billion (S$708.7 billion) in new money, while active managers saw US$340.1 billion in redemptions, according to data from Morningstar.

"It offends his sensibilities since so many people have extracted so much from the system for so little net benefit," said Mr Steve Wallman, a money manager. The letter is "going to have a massive ripple effect. It always does. And it should".

Berkshire Hathaway said fourth- quarter profit rose by 15 per cent, fuelled by a gain on an investment in Dow Chemical. Net income increased to US$6.29 billion, or US$3,823 a share, from US$5.48 billion, or US$3,333, a year earlier.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on February 28, 2017, with the headline 'Buffett stings hedge funds anew in annual letter'. Print Edition | Subscribe