WORLDVIEW: How Warren Buffett drove a very long nail into money managers’ coffins

By Alec Hogg.For years, Berkshire Hathaway chairman Warren Buffett kept banging away how fees destroy investor returns. To prove his point, he put up $500,000 as a reward for any investment professional who believed they could beat the market over a decade..Nine years ago, Ted Seides of Protégé Partners, a US specialist fund-of-hedge-funds firm, took up the challenge. He put together five pools each of which invested in a group of underlying hedge funds, 100 in all. Buffett's bet was the Vanguard S&P 500 exchange traded fund which tracks the US market's umbrella index, charging a fee of just 5 basis points..___STEADY_PAYWALL___.With a year still to run Buffett's selection is so far ahead that the race is over. The result is sure to reverberate – providing pause for the tens of millions who believe the marketing machines of actively managed money funds. As the Berkshire chairman puts it: the promoters of these pools have amassed "staggering fortunes by touting their stock selecting prowess". They have been tested and shown to be wanting..Since the well-publicised bet kicked off in January 2008, Vanguard's S&P 500 tracker has delivered 85.4%, comfortably beating all of Seides's five horses in what has turned into a very one-sided race. Best of Seides's selections delivered 62.8% over the nine years. Three of his funds returned single digits (2.9%; 7.5% and 8.7%) and the last a modest 28.3%..Overall, money spread across Seides's five funds compounded at just 2.2% a year. Buffett's market tracker delivered 7.1%, which is in line with the kind of long-term return stock markets tend to deliver. Put differently, a $1m investment made with Seides's five in 2008 has gained $220,000 – barely a quarter of the $854,000 return from the overall market..Buffett's successful wager reminded me of something similar that independent financial advisor Magnus Heystek floated in the late 1990s. Heystek, then hosting a wildly popular personal finance show on Radio 702, ran a tongue-in-cheek investment performance competition to educate listeners on the benefits of saving..Magnus picked a group of unit trusts, another pro opted for an insurance product and Jack Milne, whose Progressive Systems college had for two decades been teaching clients how to invest in shares, selected a portfolio of stocks. lt all ended really badly. Milne claimed he had won the competition, insisted the "results" be published in a newspaper, and leveraged his claimed prowess to launch an investment fund, called PSC Guaranteed Growth, which raised hundreds of millions from the public..Claimed "returns" on the portfolio whose constituents he refused to disclose, were pure fiction. Milne was eventually unmasked and jailed. His partner, the fund's guarantor Tigon CEO Gary Porritt, has somehow managed to keep postponing his trial and is still fighting the criminal charges. As Heystek told me yesterday, what he intended as a bit of educational fun ended up causing lots of pain. But it is also a timely reminder that as Buffett teaches, transparent, low-cost options are always the best investments.

WORLDVIEW: How Warren Buffett drove a very long nail into money managers’ coffins

Related Stories

Meet Tshepo Mahloele – Big Capitec shareholder, ABSIP’s “CEO of the Decade” now accused by Holomisa as kingpin of corrupt network

PREMIUM: Making of a great editor – the George Palmer playbook

Premium – BizNews global portfolio: ASML joins – so does Adobe as Bull takes hold again

Alec Hogg: Helen Zille predicts SA choice will be DA or EFF