How Warren Buffett’s investment advice has turned global mutual fund industry ‘passive’

By: | Published: May 23, 2018 10:39 AM

Warren Buffett has time and again advised investors to opt for low-cost index funds rather than burning a hole in the pocket by giving high fees to professional managers. According to Morningstar, this has led to an unprecedented growth in passive investing globally.

According to Morningstar, Warren Buffett’s advocacy to use low-cost passive investment vehicles has contributed to a growing pool of support towards the ascendancy of low-cost investing.

Legendary billionaire investor Warren Buffett has time and again advised investors to opt for low-cost index funds rather than burning a hole in the pocket by giving high fees to professional managers. “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. Both large and small investors should stick with low-cost index funds,” he wrote in Berkshire Hathaway’s annual letter to shareholders in 2016.

Turns out, this philosophy advocated by Buffett, has led to an unprecedented rise in AUMs of passive funds worldwide. “Warren Buffett continues to solidify his reputation as one of the most likeable, warming, thoughtful investors to have graced the planet. Yet in his public dialogue over the past 10 years, he has inadvertently contributed to the changing face of investing,” noted Morningstar in its latest report.

According to the report, Warren Buffett’s advocacy to use low-cost passive investment vehicles (along with the likes of Jack Bogle, the founder of Vanguard) has contributed to a growing pool of support towards the ascendancy of low-cost investing. “In fact, the rise of passive funds has resulted in a 537% increase in total assets since 2007 versus only 137% for active funds (to 31/03/2018),” the report said.

According to Warren Buffett’s estimate, an average investor wasted more than $100 billion on high-fee Wall Street money managers over the past 10 years, and hence he advises the,m against it. A study published by S&P Dow Jones Indices in 2016 showed that about 90 percent of active stock managers failed to beat their index targets over the previous one-year, five-year and 10-year periods. The high fees charged by the managers explain a significant part of the underperformance, as it eats into the returns of the funds.

While active versus passive investing remains a raging debate in the investment community globally, billionaire investor, Warren Buffett is clear–active investment management by professionals would underperform the returns made by amateurs who invest passively. Based on this clarity, he even won a recent bet worth  $500,000 against hedge fund manager Ted Seides.

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