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Warren Buffett slams active managers, fetes Vanguard founder

In his annual letter to shareholders, the world’s most famous investor was as effusive in his praise of Bogle as he was in his disdain for the high fees charged by Wall Street.

“If a statue is ever erected to honour the person who has done the most for American investors, the hands down choice should be Jack Bogle,” the Berkshire Hathaway founder told investors in Nebraska on Saturday.

“For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing – or, as in our bet, less than nothing – of added value.

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

Gordon Gekko

Buffett advised all investors to embrace index funds, warning that, “as Gordon Gekko might have put it: fees never sleep”.

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the client.

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

Citing a 2005 Berkshire report, Buffett argued that active investment management by professionals, in aggregate, would, over a period of years, “underperform the returns achieved by rank amateurs who simply sat still”.

“I argued that the massive fees levied by a variety of ‘helpers’ would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost invest fund,” the 89-year-old billionaire said.

“Over a 10-year period, commencing on 1 January 2008 and ending on 31 December 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs, and expenses,” he predicted.

10-year bet

In 2005, Buffett offered a wager of $0.5m (£0.4m, €0.47m) that no investment professional could select a set of at least five hedge funds that would, over an extended period, match the performance of an unmanaged index fund that charged “only token fees”.

Buffett named a low-cost Vanguard S&P fund as his contender for the course of the 10-year bet.

One man stepped up to the challenge and, nine years later, Buffett revealed that $1m invested in the five funds-of-funds gained, through 2016, $220,000.

This compared with $854,000 for the Vanguard fund.

Kirsten Hastings

Kirsten is international editor of Expert Investor and International Adviser. She joined Last Word Media in October 2015. Kirsten has a Masters in Financial Journalism from the...