Warren Buffett's latest pearl - Managed Funds, 31407160, page-3 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

Originally posted by Occam Logic ↑

For my two cents, I think this is a rather narrow point of view, even though it has some merit. Giving your money to an asset manager, as part of a sensible investment strategy, is not dumb providing you are making an informed decision. It's not to say Buffet was wrong, far from it. But it's not the whole story. Investing in active strategies involves taking on all the risks that come with pursuing active mandates. But this does not mean that all active managers have no value.

It needs to be remembered that not all active managers are simply trying to beat the market. Some are trying to provide downside protection in the knowledge that they will give away upside in momentum driven markets. Others, like many hedge funds, are trying to deliver an alternative or low correlated source of equity market beta.

Yes, the majority of active managers do not beat a broad market index (let alone index funds). Yes, performance persistence is a real obstacle. Personally I believe that a great many investors in managed investments, in the absence of the ability or resources to make informed decisions, are probably better off using low cost market cap weight index strategies rather than active managers. But the whole active vs passive debate is more nuanced than just saying "Giving your money to an asset manager is dumb".

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Occam

I don't think Buffett (as I understand this) was trying to foster the Active/Passive debate. Needless it will go to the debate, by implication.

I say he only sought to focus on whether the Asset Managers had the vouched capability to add ANY value at all.

Hence the Funds Selected (the various Funds were kept anonymous - due to the potential negative outcome of looking bad in front of Buffett/Munger) were of varied style, like say Fund of Funds, Macro, Top Down, Interest Geared/Risk adjusted/Hedged, Risk Diversified, Foreign/Domestic

The criteria was more the esteem of the asset manager, rather than their styles. "Give us what you have got..." rather than about the benchmark, (The recapitalistised S&P 500 which metric we all know).

None even made that!...which is the fish in the barrel approach to asset management, I say?

Doubtless all fees & bonuses where duly paid to all the managers.

An approach that demands an often somewhat offensive 'university reared chicken', with cufflinks, designer suit, immaculate dentures, metrosexual deodorant and a rather flashy doily pocket square to achieve any sort of real return.

Or s.i.g.

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You give your cash to the average director of a company in the hope that he'll return you in excess of 7.5% p.a. without diminishing the real asset either.

Give your cash to the BHP the directors & their collective fees are less that 0.1% p.a. to afford you, 8.9% p.a. growth on book, and 3.7% (before dividends)

Give your cash to an asset manager, and their fees range (today around 1.5% before expenses to conventions, mistakes, admin fees) and at best you can hope for 6.5% p.a. gross!

In other words - you are paying asset managers nearly 2%, (on average i.e. X20 the going rate ) to lose you 6% per annum!

Asset managers are the closest thing to legal fraud.
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b.t.w. Buffett comes down hard on the risk management achieved by holding cash & treasuries, which over 10 years underperformed.