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Warren Buffett Says Stick To Index Funds

At his annual shareholder meeting, the Berkshire Hathaway Chairman reiterated that investors are better off avoiding actively managed funds.

  • Alicia McElhaney

At Berkshire Hathaway’s annual shareholder meeting, Chairman Warren Buffett said investors should stick to index funds, offering a harsh view of actively managed strategies.

“In all the professions, there is value added by the professionals as compared to doing it yourself and randomly picking laymen,” Buffett said during the meeting, held in Omaha, Nebraska over the past weekend. “In investing that just isn’t true.”

The legendary investor cited high fees and disappointing results as reasons for his position in the long-lasting debate over the merits of investing in passive funds versus those that are actively managed. Buffett’s Vice Chairman, Charlie Munger, agreed that the typical hedge funds fee structure is detrimental to investors.

“The investing world is a morass of wrong incentives, crazy reporting and a fair amount of delusion,” Munger said during the annual meeting.

This isn’t the first time that Buffett has criticized hedge funds for their fee structure.

“A number of smart people are involved in running hedge funds,” Buffett said in his annual letter to shareholders. “But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors.”

His remarks reflect a large move on the part of institutional investors to passively managed fund that allow them to save money still seeing strong returns. Buffett noted in his annual letter to shareholders that between Jan. 1, 2008 and Dec. 31, 2017, the Standard & Poor’s 500 Index will outperform a portfolio of hedge funds outperform, after factoring in fees, costs and expenses.

Last year, the New Jersey State Investment Council, the New York City Employee Retirement System and Metlife Insurance Company were among institutional investors that withdrew capital from hedge funds, according to the 2017 Preqin Global Hedge Fund Report.

“Many of these large institutions cited performance concerns and the high fees as the leading reasons driving their decisions to reduce their exposure to hedge funds,” Preqin said in the report.

Buffett predicted as far back as 2005 that actively managed funds would underperform index funds, according to his annual letter to shareholders. The rivalry between the two strategies isn't going away anytime soon, though.

“The debate has been very long lasting because it tends to be about competition,” Don Bennyhoff, a senior investment strategist at Vanguard Group, said by phone Monday. “A lot of active management proponents are active managers.”

Vanguard, well-known for pioneering the index fund, has about one-third of its business in actively managed funds, according to Bennyhoff. The goal, he said, is keeping fees down in both active and passive strategies as the firm seeks to deliver returns to investors.

“The common denominator is our focus on lower costs,” Bennyhoff said.