When billionaire Warren Buffett offers financial advice, most wise investors take the time to stop and listen.
That’s why he’s announcement that when he dies, his vast fortune will go into a tracker fund as a passive investment came as such a shock to many.
For a man who built his empire from carefully picking and trading stocks, switching from active to passive investing is more than a surprise.
Buffett, 83, along with his following of investors, has struck out at fund managers, who he says do not live up to their pledge of beating stock market performance with their skills and technology.
Instead, they just command high fees coupled with a failure to deliver.
Managed funds perform poorly
Buffett’s advice follows investor thinking. Today, a quarter of London stock market money is in tracker funds – almost double the amount of 10 years ago.
In Wall Street, the move has been more decisive as investors have shifted half their cash away from managed funds to index funds.
Europe is also following the lead of New York and The City, with 20% of money transferring out of popular mutual funds into trackers.
Casino banking, complicated financial contracts and lack of results have all put nails into the managed fund coffin since the credit crisis.
Investors want consistency and certain returns to provide an income – the days of speculative investment to garner big profits are drawing to a close as regulators step in to exert the rule of law over what was the wild frontier of investing.
Now, the big fund managers are slashing fees to complete with online platforms and self-managed investments.
Winners and losers
“Banks and investment houses grew fat on the pickings of fixed fees from managing investments,” said Chris Iggo, chief investment officer for fixed income at AXA Investment Managers.
“They just can’t get away with the fees they charged a few years ago because the market is more transparent and investors simply won’t pay what they demand.
“It’s just surprising everyone took so long to see through the smoke and mirrors to understand exactly what was going on.”
Buffett summed up the malaise in a letter to investors in his Berkshire Hathaway conglomerate.
“The goal of the average investor is not picking winners. No one can do that all the time. The goal is to put together a portfolio of businesses in different sectors that promise to perform well.
“A low cost tracker fund will do this as well, if not better, than any fund manager.”