Billionaire investor Warren Buffett, who is the chairman of the US-based conglomerate Berkshire Hathaway, has always been against the hedge fund industry and the high fees charged by those funds.
In fact, he recommends investors to invest in a low-cost index fund for the long-term, instead of giving them to the professionals running hedge funds. Buffett’s rationale is that the high fees charged by the professionals would easily eat into the gains made. This is what Buffett wrote on the topic in his 2016 Berkshire Hathaway annual report:
“A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.
The bottom line: 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.”
And regarding this matter, Buffett has done more than just write. In 2007, he entered a bet with fund manager, Protégé Partners. In the wager, Buffett professed that a low cost fund tracking the S&P 500 index would beat a basket of hedge funds over a 10-year period. The 10 years are now over, and the results are in. The five hedge funds’ average annualised gain came in at 2.1%, while Buffett’s S&P 500 index fund has amassed an average return of 7.1%, according to The Wall Street Journal.
In every year except 2008, the index fund managed to beat the average of the hedge funds as seen below:
Source: Fool.com article
It’s never smart to bet against Buffett, who has grown Berkshire’s book value at an incredible annual rate of 19% from 1965 to 2016. If we want our portfolio to do well for the long-term, we could also put some money into index funds too.
Over in Singapore, there are two exchange-traded funds (ETFs) that track our main market benchmark, the Straits Times Index (SGX: ^STI). The ETFs are the SPDR STI ETF (SGX: ES3), and the Nikko AM STI ETF (SGX: G3B). A comparison of the two funds can be found here.
According to the Singapore Exchange (SGX: S68), the SPDR STI ETF has produced a total return of 220.2% from its inception in April 2002 through to 9 January 2018. Meanwhile the Nikko AM STI ETF, which was listed in February 2009, has brought in a total return of 165.5% since. The long-term total returns of the ETFs, which are inclusive of dividends, are not too shabby at all. In fact, there is an important advantage that long-term investors have: Historical data from the Straits Times Index shows that the longer you hold your stocks, the lower your odds of making a loss.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Sudhan P owns shares in Singapore Exchange Limited.