David Winters – Index Fund ContrarianVW Staff
Are you looking for some good news? According to the Federal Reserve, the economy is strong enough to “warrant gradual increases in the federal funds rate.” The official plan is to increase the rate two more times this year, although the Federal Open Market Committee held off in this week’s policy setting meeting after the economy exhibited tepid growth in the first quarter, a result central bank officials expect is “likely to be transitory.” The Fed raised the fed funds rate a quarter- percentage-point in March to its current range of 0.75% and 1% and if conditions warrant is expected to do so two more times this year.
Meanwhile back in the investment world, I am trying to get my head around the monumental flow of funds going into passive index funds and out of actively managed ones.
Indexing is being almost universally presented as a no-brainer, a slam dunk. Even Warren Buffett, one of the greatest active investors of all time has been recommending it for his family, friends and just about everyone else. His now famous advice from his 2013 annual shareholder letter bears repeating. It is the instructions he has left in his will for his wife’s bequest: “My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
In Buffett’s view, practically anyone who doesn’t buy and hold, “invest in stocks as you would in a farm” as he once put it, is a high- fee manager. It seems just about everyone is now following his advice.
According to The Wall Street Journal “In 2016, 82% of new retail investments coming through financial advisers (more than $400 billion) went into index funds and ETFs…” The lion’s share has gone to Vanguard. Over the last 3 calendar years, Vanguard has received 8.5 times as much money as the rest of the mutual fund industry’s 4,000 plus other firms - $823 billion for Vanguard vs. $97 billion for its competitors.
By one estimate, Vanguard traders put as much as $2 billion dollars a day into stocks in their index funds, a huge portion of which goes into the five stocks with the largest market value, or capitalization. Five tech stocks, Apple, Alphabet (which is Google), Microsoft, Amazon.Com and Facebook have dominated recently. At one point they accounted for 53% of the S&P 500’s year-to-date gain.
This kind of concentration is just one of the reasons this week’s guest, David Winters, is critical of index funds. He is an active manager so they also threaten his business.
Winters is Founder and Portfolio Manager of the global, value-oriented Wintergreen Fund which he launched in 2005.
Wintergreen is known for its long term investments in high quality, global companies which delivered outstanding performance before the financial crisis.
The fund has badly lagged the S&P 500 since, although it has outperformed an all country ex U.S. world index.
Winters and his team have analyzed the financials of all of the S&P 500 companies and have discovered what they call “look through” expenses, hidden costs which make index investing much more expensive than advertised. Challenging popular opinion is never easy, but Winters is raising the alarm about the flood of money pouring into index funds. He explains why he believes it is becoming a high risk strategy.
Thank you for watching. Have a great weekend, and make the week ahead a profitable and a productive one.