Over the past 50 years he has shared many of his views with his investor “partners” through his Berkshire Hathaway annual report, a comprehensive explanation for its shareholders of the progress of the business, as well as of other matters of contemporary relevance to the world of investing.
He is renowned for his modesty and wisdom, his folksy wit, and his optimism, but most of all for his habit of being right. From the early 90s onward he campaigned consistently for the expensing of option grants as a compensation cost when they were routinely granted as an incentive to executives. In the early 00s he warned of the potentially destructive impact of derivatives on the balance sheet of leveraged institutions (banks). In each case his obvious common sense diagnosis of the problem was resisted by many vested interests for many years, but eventually the logic became too strong to resist. Years later, option grants are finally routinely expensed against earnings and we are fast approaching the 10th anniversary of the Global Finance Crisis, precipitated by the highly leveraged institutions whose risks had been concealed by complex derivatives positions.
In his most recent annual report he renews his criticisms of “active investment management” and “hedge funds” in particular. He reminds us of the long-term bet he placed nine years ago that a low-cost index fund would outperform a portfolio of sophisticated hedge funds; a bet that with one year to go he is close to winning hands down. As he has many times before, he criticises “Wall Street” for being fee driven to the detriment of investors. He does not impugn the integrity of money managers, describing them as “… in almost all cases… honest and intelligent people…” But his central thesis is that the high costs associated with active management detract substantially from long run investment returns without, in aggregate, adding any value overall.
He doesn’t deny that the potential for exceptionally talented managers to emerge exists; however, he observes that since the vast majority of active managers are doomed to failure, the chances of any investor successfully picking such a future star are slim. His conclusion?
“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”.
This is withering criticism of the active fund management industry overall, and it is hard to argue convincingly against. At Winton we would make the argument that our directly investable funds have much lower fees than hedge funds are generally assumed to have, and that our historical risk-adjusted returns after fees have been creditable. We would also make the case that we have invested in the creation of a substantial scientific research group with the ability to pursue ground breaking work in the intelligent automation of a long-term investing strategy. Given the advances in many fields over the past 50 years, such as computing and software, it does seem plausible that this sort of research project is worthwhile paying fees to finance.
Investors need to be conscious, however, that they are financing such an expensive and long-term investment with far from certain prospects of success. It is, undoubtedly, something of a gamble whether investing with Winton will be better than investing across the broader industry that Warren Buffett credibly questions the value of. For some investors, it is a gamble worth taking. For others it is one they can’t afford. Investors should contemplate all the risk warnings in Winton’s documentation before investing or staying invested.
Our strategy is to pursue ambitious investment in research, data and technology, with the potential to lead to new transformative discoveries in finance, such as occur in other fields. In the end, in most markets we are not competing with low-cost index funds, and we continue to hold out hope that we may just be a future star in the making.