Do you realise that when you pay an advisor a % of your assets or give it to fund managers who charge fees that can go up to over 2% annually or take share of profits, that unless your returns are much higher than Sensex or Nifty returns, you lose while the advisor/fund manager gains.
Warrant Buffet is telling investors they are idiots to make other people rich with their savings and there is always a low cost alternative that will benefit you.
The annual letter to shareholders of Berkshire Hathaway Inc. is the most widely awaited and read by market watchers and investment professionals as it a letter like no other.
Warren Buffet writes it in his own inimitable folksy style like a personal letter to every share holder filled with candour and wisdom of how they assess their portfolio and what they did right and where they went wrong and why. The letter is also peppered with pearls of wisdom which are revered by the investment community.
This year’s 29 page Berkshire Hathaway letter has devoted no less than 3 pages to the advantage of low cost index funds v/s actively managed funds
Some quotes & gist from those pages on what he thought about high investment fees and his wager on them.
“In Berkshire’s 2005 annual report, I 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 explained 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 index fund.
Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender.
I then sat back and waited expectantly for a parade of fund managers – who could include their own fund as one of the five – to come forth and defend their occupation. After all, these managers urged others to bet billions on their abilities.
Why should they fear putting a little of their own money on the line?”
Only one man – Ted Seides –stepped up to Warren Buffet’s above challenge. Ted was a co-manager of Protégé Partners, an asset manager that had raised money from limited partners to form a fund-of-funds – in other words, a fund that invests in multiple hedge funds.
From 2008 to gains to date in 2017, the results were as follows:
The compounded annual increase to date for the index fund is 7.1%, which is a return that could easily prove typical for the stock market over time.
The five funds-of-funds, selected by Ted Seides delivered, through 2016, an average of only 2.2%, compounded annually. That means $1 million invested in those funds would have gained $220,000.
The low cost index fund would meanwhile have gained $854,000.
This is a pretty rough indictment on asset managers en masse.
Warren Buffet does admit that there will always be managers who will out perform markets but he believes that passive investors who invest in low cost Index fund will outperform active fund Managers because a lot of the return will be gobbled up by annual fees & high performance fees to the investment managers and additional trading costs.
In a stupendous calculation he says in the letter that over the past decade a waste of $100 billion dollars have happened in search of superior investment advice.
He then goes on to sing paens of praise in honor of John Bogle, the creator of ultra low cost Index funds. In his opinion, he has done the most for American investors, and should have the satisfaction of knowing that he helped millions of investors realise far better returns on their savings than they would have otherwise earned.
How to apply this advise in the Indian context?
In India there are low cost Sensex or Nifty Index ETF’s that help you gain strong equity returns when markets are rising. Given the numerous equity schemes, which is highly difficult to understand and follow and of which only a few outperform the market, you are much better off in ETF’s. All you require to do in an ETF is to analyse or take the help of a good advisor to judge whether equities will rise or fall over the next few years. Equities always have ups and downs and you would need to avoid getting caught at market peaks from which the fall can be deep and long.
In 2014, SEBI mandated mutual funds to come up with direct schemes circumventing the distributor. Of the e Rs 17.83 trillion assets under management of the industry 40% are under the Direct plans.
90% of the AUM under direct plan is under debt schemes, which speaks for something.
Lower cost matter, it is normally hidden so costs are not associated with your investments. But a lower cost in your investment can make a huge difference to the growth of your savings.
The difference between the cost of a regular plan & a direct plan of an equity scheme is typically 0.5-0.9%.
The difference between cost of regular plans & direct plans of debt schemes is between 0.3-0.5% , but some high cost schemes like credit schemes it can go upto 0.75-1%. If the return on your debt funds which are getting lower by the day as rates have hardened is 8%, a difference of 0.75% means that close to 9% of your return is being eaten up by higher cost.
Click here to know how to invest in Direct Plans.
Be thrifty , a seemingly small saving in cost can compound and make a huge difference to your return.