Business

Buffett decries hedge fund managers

In his annual letter to shareholders of Berkshire Hathaway, billionaire investor Warren Buffett applauded the U.S. economy along with his firm’s performance as a conglomerate holding company, but criticized practices of Wall Street hedge funds.

What is seen in all of Buffett’s annual shareholder letters is optimism for the future, fueled by impressive growth in the past. With a 14 percent increase in net income to $6.29 billion from the prior year, strategic investments in the insurance and utility industries, among others, and successful long term deals with companies—such as the Bank of America deal, which can potentially bring the company $10.5 billion at any moment until 2021. Berkshire Hathaway has impressed the business world year in and year out. The most recent evidence of this is the firm’s 23.4 percent increase in stock price in 2016.

Buffet, known as the “Oracle of Omaha” for his consistent record of over-performing the stock market for 50-plus years, is traditionally optimistic about economic prospects—regardless of how disheartening circumstances may be. With all the economic and political uncertainty from the Federal Reserve’s anticipated interest rate hike to President Donald Trump’s ambiguous rhetoric and policies, Buffett’s opinion has not changed for 2017.

In his annual letter, Buffett writes, “Yes, the build-up of wealth will be interrupted for short periods from time to time. It will not, however, be stopped. I’ll repeat what I’ve both said in the past and expect to say in future years: Babies born in America today are the luckiest crop in history.”

Buffett, a vocal supporter of Hillary Clinton during the 2016 presidential election, strayed away from mentioning Trump or politics directly. He may have, however, aligned himself with those who criticize Trump through the mentions of the economic and historical significance of U.S. immigrants.

“Our efforts to materially increase the normalized earnings of Berkshire will be aided – as they have been throughout our managerial tenure – by America’s economic dynamism. One word sums up our country’s achievements: miraculous. Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.”

Buffett summarized his optimism for broad U.S. economic achievement—a quality of the United States that he credits in part to immigrants. This may be an indirect comment on recent politics, considering Trump’s rhetoric and policies on immigrants in the United States.

Hedge fund and investment managers of Wall Street took up a good portion of the 30-page letter as well. As a strong advocate of index funds, exchange-traded fund and generally less volatile sectors such as utilities, Buffett has supported passive investments over active investments for many years. Buffett criticized highly paid fund managers of Wall Street for over-promising and under-delivering, while collecting huge fees from their clients.

“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.”

Of the pages of data that backed up this argument, the most convincing was a bet that Buffett waged with asset manager Protege Partners, which involved comparing the performance of any five hedge funds with an unmanaged S&P 500 index fund over 10 years. Nine years in, Buffett’s index fund, administered by Vanguard, increased 85.4 percent without any fees, while the average of the five funds is up a meager 22 percent—a profit that cost investors an average of 2 percent fixed annually and 20 percent of all profits.

March 6, 2017

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