Buffett rails against high fees, executive pay
NEW YORK (Reuters) - Warren Buffett on Thursday said investors shouldn't chase big returns from hedge funds or other managers who charge excessive fees.
He also called on shareholders to press for executive-pay reform, saying current "irrational" practices allow mediocre chief executives to receive "astronomical" awards.
Buffett made his comments Thursday in his annual letter to shareholders of his Berkshire Hathaway Inc. (BRKa.N) (BRKb.N) insurance and investment company.
Long an advocate of investing in healthy companies at low prices, Buffett said more investors are deluding themselves by chasing potential high returns from firms that charge too much.
He pointed to what he called last year's "flood" of money going to "the 2-and-20 crowd" -- hedge fund managers who charge a 2 percent annual fee off the top, plus 20 percent of profits. Investors, he said, could do better buying a low-fee index fund.
"Its effects bring to mind the old adage: When someone with experience proposes a deal to someone with money, too often the fellow with money ends up with the experience, and the fellow with the experience ends up with the money," Buffett wrote.
Roughly 8,000 hedge funds worldwide invest about $1.3 trillion. Last year, however, more than 450 went out of business, according to New York-based Hennessee Group. In the biggest implosion, Amaranth Advisors LLC liquidated after losing $6.6 billion from bad bets on natural gas.
"Only a select handful of individuals will hire the right people to generate (big) returns," said Steven Check, who oversees $550 million at Check Capital Management Inc. in Costa Mesa, California, including 20 percent in Berkshire. "In my experience, people who don't know how to invest themselves don't know how to choose money managers who can either."
Indeed, hedge funds lagged broader market indexes.
According to Chicago's Hedge Fund Research Inc., the average hedge fund returned 12.99 percent in 2006, the most since 2003.
In contrast, the Vanguard Total Stock Market Index fund VTSMX.O, a rough proxy for the U.S. stock market, returned 15.51 percent, with an annual fee of 0.19 percent. The Vanguard fund also beat hedge funds in 2003 and 2004, though not 2005.
EXECUTIVE PAY
Paying too much is also a problem in the executive suite, Buffett said.
His comments come as shareholders and governance groups angle for a greater say in setting compensation for top executives.
That comes after the U.S. Securities and Exchange Commission mandated more detailed pay disclosures, and criticism for Home Depot Inc.'s (HD.N) awarding former chief executive Robert Nardelli $210 million of severance.
Buffett rejected a common practice where companies refer to how rivals pay their CEOs to justify pay for their own. This "all the other kids have one" approach, he said, creates a myth that if others are paying up, then the pay must be fair.
"Compensation reform will only occur if the largest institutional shareholders -- it would only take a few -- demand a fresh look at the whole system," he said. "The consultants' present drill of deftly selecting 'peer' companies to compare with their clients will only perpetuate present excesses."
Buffett said he has sat on 19 corporate boards outside Berkshire, but on just one compensation committee. He takes a $100,000 annual salary to run Berkshire.
Buffett was worth $46 billion last year, according to an estimate by Forbes magazine.
