Only a Market Crash Can Stop Warren Buffett From Winning This $1 Million Bet
It would take a massive stock-market crash for Buffett to lose the wager
It was a $1 million bet: Could hedge funds outperform index funds over a decade?
Warren Buffett said no in 2007. Now it looks like the billionaire investor was right.
His chosen index fund, the Vanguard 500 Index Fund Admiral Shares, climbed 66% from the start of the bet through the end of 2015, compared with a gain of 22% for a basket of hedge funds selected by asset manager Protégé Partners, including fees.
The $1 million bet with Protégé Partners ends Dec. 31. At this point, it would take a massive stock-market drop for Mr. Buffett to lose. An extended bull market and subpar performance by many hedge funds since the 2008 financial crisis have helped his case.
The proceeds will go to the winner’s chosen charity—Girls Inc. of Omaha, Neb., if Mr. Buffett wins or Absolute Return for Kids if Protégé Partners wins. The Long Now Foundation, a San Francisco nonprofit that encourages people to think longer term, is holding the stakes of the bet and will determine the winner.
The irony of the wager is that Mr. Buffett isn’t always a champion of passive investing. As Berkshire Hathaway Inc.’s chairman and chief executive, Mr. Buffett became one of the world’s richest people by investing in undervalued stocks and buying companies.
In fact, the stakes of Mr. Buffett’s current bet are likely to exceed $1 million because they are invested in Berkshire shares, which have climbed rapidly in recent months.
The rising value of the purse shows that Mr. Buffett’s faith in passive investing doesn’t trump confidence in his own investing abilities, said Mohnish Pabrai, managing partner of Pabrai Investment Funds and a follower of Mr. Buffett.
“If you ask Warren to place a bet between the S&P and Berkshire…he would pick Berkshire,” Mr. Pabrai said. “Otherwise, he would say they should dissolve Berkshire and put everything into the S&P.”
A former Protégé Partners executive named Ted Seides proposed the contest in 2007 following Mr. Buffett’s repeated criticism of hedge funds, which typically charge management fees and then keep a cut of any investment gains. So-called funds of funds usually charge an additional layer of management fees.
All of those fees, Mr. Buffett argued, were eating away at investors’ returns. Cheaper funds that cloned the market were a better choice, he said.
“I wholeheartedly agree with your contention that the aggregate returns to investors in hedge funds will get eaten alive by the high fees earned by managers,” Mr. Seides said in a letter to Mr. Buffett proposing the bet. A copy of the letter was included in a 2016 book Mr. Seides authored.
But “I am sufficiently comfortable that unusually well managed hedge fund portfolios are superior to market indexes over time.”
Mr. Seides chose five funds of hedge funds that focused on equities and long-term value investing. Protégé Partners hasn’t named the funds chosen for its side of the wager, but Mr. Buffett said at Berkshire’s 2016 annual meeting that they represent “maybe 100 or 200 hedge funds.”
In a February 2015 essay, Mr. Seides blamed his side of the bet’s underperformance on “a number of cyclical headwinds,” including low interest rates.
Mr. Buffett, Mr. Seides and Protégé Partners all declined to comment.
When the bet launched, Protégé Partners told Fortune Magazine that it had a 85% chance of winning. Mr. Buffett gave himself a 60% chance. The ensuing decade was particularly unusual, encompassing the 2008 financial crisis, unprecedented activity from central banks around the world and negative interest rates in some countries.
Fortune, which reports the annual results of the bet, hadn’t released as of Wednesday how the two sides compared in 2016. But the S&P 500 rose 12% last year including dividends, while all hedge funds as a group rose 5.5%, according to researcher HFR Inc.
Mr. Buffett and Protégé Partners originally put about $320,000 each into bonds that would appreciate to $1 million over the course of their wager. But the bonds appreciated much faster than expected as interest rates fell so the two sides agreed to go for a bigger prize. In late 2012, they agreed to buy 11,200 shares of Berkshire B shares, which cost $89.70 at the end of 2012.
That bet within a bet—that Berkshire shares would rise between late 2012 and the end of 2017—has paid off.
Berkshire B shares have risen about 90% since the end of 2012 to $169.61 Wednesday, putting the value of those 11,200 shares at almost $1.9 million. During the same period, the S&P 500 is up 81%, including dividends.
Mr. Buffett’s annual letter to Berkshire shareholders, which will be released Saturday, will discuss his views on active and passive investing and fund fees, he has said in recent months.
When Mr. Buffett ran his investment partnerships in the 1960s, he charged no management fees and only took 25% of investment gains after the first 6%. Berkshire Vice Chairman Charles Munger praised that fee model earlier this month at the annual meeting of Daily Journal Corp., where Mr. Munger is chairman.
“I think it is fair and I wish it was more common,” he said of Mr. Buffett’s fee formula. “If it’s a bad stretch, why should you scrape money off the top?”
At Berkshire’s annual meeting last year, Mr. Munger pointed out that some money managers, including Mr. Buffett, do outperform the market. Mr. Buffett retorted: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”
Italy’s Andrea Orlando challenges Matteo Renzi for party leadership
Justice minister’s move poses most serious threat so far to former PM’s bid to reclaim power
Andrea Orlando, Italy’s justice minister, is challenging Matteo Renzi for leadership of the ruling Democratic party, signifying the most serious threat so far to the former prime minister’s bid to reclaim power.
“I have decided to become a candidate because I believe the PD needs to change profoundly in order to be truly useful to Italy and the problems of Italians, who are experiencing very difficult times,” Mr Orlando said on his Facebook page.
The move by Mr Orlando comes at a moment of upheaval in the PD, which is struggling to recover from the defeat of its flagship constitutional reforms in a December referendum and the ensuing resignation of Mr Renzi as prime minister.
On Sunday, Mr Renzi resigned as head of the PD to launch a leadership battle that he hopes to use to regain legitimacy within the party and the wider electorate.
The battle for the PD is important because it will set the stage for the next Italian elections, due within a year, when the ruling centre-left party will face the anti-establishment Five Star Movement for control of the government. Five Star is the most prominent populist political force in Italy, and has vowed to call for a referendum on euro membership.
Mr Renzi already has one rival as PD head: Michele Emiliano, the regional governor of Puglia in southern Italy. Mr Emiliano has argued that Mr Renzi, the 42-year-old former mayor of Florence, shifted the party too far to the centre during his nearly three years in government.
But while Mr Emiliano is backed by a vocal minority of dissidents on the left, Mr Orlando’s challenge could be more meaningful. The 48-year-old has more credibility among rank-and-file PD lawmakers, putting him in a better position to woo legislators who backed Mr Renzi’s reformist vision but are disappointed with the results.
Nevertheless most analysts believe the PD leadership race — to be decided in April or May — remains Mr Renzi’s to lose.
“Orlando is a serious figure who comes to the contest with a larger chunk of the party than Emiliano does,” said Vincenzo Scarpetta, an analyst at Open Europe in London. “But I do not believe either of them have the support to beat Renzi in the primary, so this could actually help him by showing there will be a genuine debate and not just a coronation,”
Mr Orlando suggested that his campaign would offer a contrast in policies and also in style to Mr Renzi. “I am not resigned to the fact that politics can only be based on arrogance,” he said.
Mr Orlando was elected to parliament in 2006, and was appointed environment minister in 2013 in the government of Enrico Letta, before becoming justice minister under Mr Renzi in 2014.
Marco Tarchi, a professor of political science at the University of Florence, said: “Orlando is trying to be a bridge between the left and sceptical Renzi-ites, but he does not seem to have the sufficient stature.”
The Greenlight Capital founder, whose stock picks move markets, has separated from Cheryl, whom he married in 1993 before he made his fortune, now estimated at an impressive $1.55 billion.
At stake in the upcoming divorce is their nearly 10,000-square-foot home in Rye, NY, and — possibly — his rumored vault of gold stashed at a secret location in New York City. He has reportedly said the gold is used by his fund as a hedge against inflation.
Cheryl, with whom David has three children, is an award-winning financial reporter and media consultant who has also taught at Columbia University Graduate School of Journalism and Columbia Business School.
She is also credited with coming up with the name “Greenlight” when he launched his fund in 1996.
The couple is well-known in New York for their philanthropic work. In 2002, they established the Einhorn Family Charitable Trust, “with the vision of building a more peaceful and harmonious society,” according to its website, which features numerous photos of Cheryl and David.
He also serves on the boards of City Year, the Michael J. Fox Foundation for Parkinson’s Research, and as chair of the Robin Hood Foundation’s board of directors.
A spokesman for David Einhorn declined to comment Wednesday night, and Cheryl didn’t return calls and email requests for comment.
This is the latest in a series of high-profile hedge fund divorces. Page Six revealed last December that billionaire investor Bill Ackman and his wife, Karen Ann Herskovitz, had split after 25 years.
Citadel billionaire Ken Griffin settled his bitter divorce with now-ex Anne Dias-Griffin in 2015. And David Tepper, one of the world’s highest-earning fund managers, split with his wife of almost 30 years in 2014.
lerts History
- 23-Feb-2017 14:51:49 - AIRBUS AIR.PA CALLS FOR EUROPEAN MINISTERIAL MEETING TO DISCUSS LATEST A400M COST CRISIS - SOURCES
- 23-Feb-2017 14:52:23 - AIRBUS ALSO CALLS FOR TALKS WITH A400M ENGINE MANUFACTURERS - SOURCES
- 23-Feb-2017 14:52:43 - AIRBUS SAYS IN LETTER IT IS COMMITTED TO A400M PROJECT BUT MUST 'SUSTAIN THE VIABILITY OF AIRBUS' -SOURCES
EXCLUSIVE-Airbus calls for European ministerial meeting on A400M - Reuters News
23-Feb-2017 15:03:24
Feb 23 (Reuters) - Airbus AIR.PA has called for a European ministerial meeting to address the latest problems engulfing the A400M military plane, saying its own viability is at stake as it seeks government help to contain fresh losses on Europe's largest defence project.
The move comes a day after Airbus took a fresh writedown of 1.2 billion euros against A400M losses and urged seven NATO buyer nations to limit its exposure to heavy fines and payment delays caused by new technical snags and delays. (Full Story)
In a letter to government buyers, the company spoke of "significant risks ahead" on the project, originally valued at 20 billion euros and now costing well over 30 billion euros, according to two people familiar with the letter's contents.
"We are committed to the A400M programme. However we are responsible to sustain the viability of Airbus," said the letter signed by Airbus Chairman Denis Ranque and Chief Executive Tom Enders and sent to the capitals of Belgium, France, Germany, Luxembourg, Spain and Turkey and the UK.
Noting "huge losses" on the project, Airbus called for a meeting of ministers of those nations to take stock of the situation and agree on next steps in the best interests of the programme, government customers and Europe's defence industry.
It also called for talks with Europrop International (EPI), the consortium responsible for providing the troop carrier's turboprop engines, which have been involved in some delays.
EPI is owned by France's Safran SAF.PA, Britain's Rolls-Royce RR.L, Germany's MTU Aero Engines MTXGn.DE and Industria de Turbo Propulsores (ITP) of Spain.
An Airbus spokeswoman declined comment on Thursday on details of the company's contacts with governments, but said there would be three elements to any discussions: the nations, the OCCAR pan-European procurement agency and the engine makers.
Engine consortium EPI could not immediately be reached for comment.
A spokesman for OCCAR had said on Wednesday the agency was in regular and ongoing dialogue with Airbus, but declined comment on the company's request for new measures.
Airbus received a 3.5 billion euro bailout from the seven core purchasing nations in 2010, but has suggested it did not go far enough in limiting the company's financial exposure.
Defence officials from the seven nations were expected to confer by telephone on Airbus requests as early as Thursday.
Germany, the largest A400M buyer, has so far given a cool response, saying it is important that Airbus should resolve outstanding problems on the military programme. (Full Story)
Oil To $70? Or Down To $30?
Oil To $70? Or Down To $30?
Will oil prices rise to $70 per barrel this year or fall to $30? Depends on who you ask.
Oil price forecasts are always all over the map, but the exceptional disparity between some projections for 2017 is pretty stunning. On the one hand, you have Citibank, which sees oil shooting up to $70 this year as supply continues to tighten even as demand rises.
Citi acknowledges the headwinds in the near-term. "Oil prices are not likely to stray far from their current $53-58 per barrel range in the near term as record investor net length and bearish inventory data will likely cap prices until more tangible evidence of a tighter market emerges," Citi analysts wrote in a recent research note. However, they see oil prices posting much stronger gains in the second half of the year.
But the bearish threats to oil prices on the downside seem to be a lot more visible right now than the bullish ones. Aside from rising shale production, a dagger looms over oil prices in the very near-term. Hedge funds and money managers have pushed bullish bets to a new record high, equivalent to over 1 billion barrels of oil. The massive one-sided bet leaves the oil market dangerously exposed. When the herd suddenly realizes that they are all making the same bet, there could be a stampede back in the other direction. The buildup in bullish bets is all the more remarkable because it occurred at a time when oil prices were stagnant, stuck in the mid- to low-$50s per barrel.
Study Finds Italy’s Fashion Industry Well Capitalized and Thriving
These were some of the conclusions of Mediobanca’s annual fashion industry focus research.
MILAN — Italy’s fashion industry remains in rude health, rich in cash, financially solid, ever-more export-oriented and — on average — highly profitable, even if slightly less than a few years ago. And fashion companies continue to keep the stock market at arm’s length — especially since they remain able to finance themselves through their operations.
These were some of the conclusions of Mediobanca’s annual fashion industry focus research, presented Wednesday by the Italian merchant bank in Milan on the first day of Milan Fashion Week.
Introducing the research, which covers the period 2011 to 2015 (full year 2016 data is not yet available for all companies), Gabriele Barbaresco, head of the bank’s research unit, pointed out that Italy’s fashion industry continues to have strong appeal — both domestically and internationally.
“The success of Italian fashion is very much tied to the positive image Italy manages to project internationally, which acts as a flywheel for the industry,” Barbaresco said.
This appeal is particularly strong among Chinese consumers who — according to Mediobanca — make up 33 percent of luxury goods shoppers in Italy, by far the leading foreign nationality.
According to Mediobanca (the complete research can be viewed, in Italian only, at mbres.it), globally the personal luxury goods industry grew by some 12 percent in 2015, reaching 251 billion euros, or $263.6 billion at current exchange. For the just ended full year, the bank forecasts no growth.
But — barring any disasters (man-made or other) — the future looks rosy for Made in Italy. “Fashion loves openness and outside influences” and rejects barriers and obstacles to the free movement of people, Barbaresco said.
Furthermore, thanks to its reliance on multiple retail channels — from bricks-and-mortar to online — the industry benefits from a diversification that allows for “a certain optimism looking ahead,” even if the geopolitical climate were to worsen.
As in previous years, the Mediobanca study breaks out a group of top 15 Italian fashion and luxury goods-makers from the total group of 140 “Aziende Moda Italia” firms it examines (the threshold for inclusion in the study was annual sales of 100 million euros, or $105 million).
In 2015, the top 15 group, which includes powerhouses Luxottica, Prada, Armani, Ferragamo and Tod’s, accounted for half of “Aziende Moda” total revenues of some 60 billion euros, or $63 billion, with sales up almost nine percent on 2014 and up just over 30 percent on 2011. (Luxottica alone leads the pack with some 8.8 billion euros, or $9.2 billion, in revenues in 2015.) Overall, the 140 firms represent some 4 percent of Italy’s GDP — up from 3 percent in 2011, although this has also to do with the fact that Italy’s GDP growth has slowed over the period.
The fastest growth came at Valentino (its initial public offering-eyeing parent, Qatar-based Mayhoola, must be happy), where revenues in the period grew 102 percent. Rounding out the top five are Moncler (sales growth of just over 70 percent in the period); Calzedonia (up 55 percent); Armani (up 47 percent), and Ferragamo (up 45 percent). On average, the top 15 put in 30 percent revenue growth over the period, compared to an only slightly more modest 28 percent growth for the whole 140 firm sample (and to just over 7 percent growth for Italian manufacturing in general). Of the top 15, only Benetton, which has undergone a major restructuring, saw sales decrease — a not insignificant 26 percent — over the period.
While the top 15 group usually outperforms the overall sample — including in jobs creation — the same can’t be said for profitability growth: while operating margins in this select group increased by 14 percent over the five-year period, they increased 15 percent for the total 140 sample group (and by 13 percent at Italy’s large manufacturing overall). But operating margins themselves remain noticeably higher at the top 15 group, on average 12 percent, compared to 9 percent at the 140 “Aziende Moda” group (and 4.2 percent at Italy’s large manufacturing groups), even as they have decreased slightly compared to 2011 (when they were an average 13.7 percent).
The industry — especially the top 15 — is very “solid and varied,” said Mediobanca analyst Nadia Portioli, who presented the research. Italy’s luxury goods firms are highly capitalized and very under-leveraged, which may explain their reluctance — for lack of need — to list on the stock market. According to the research, the top 15 group is sitting on some 5.5 billion euros, or $5.8 billion, in cash, up some 26 percent over the five-year period, with Max Mara and Armani leading the pack.
Too much capital is not necessarily a good thing, for — among others — it could be put to good use in value creating actions like M&A activities. But here Barbaresco said, on the contrary to less risk-averse French luxe goods makers, Italian firms are not necessarily avoiding consolidation, they are just waiting for the right opportunity.
Speaking of French firms, for the second year in a row, Mediobanca included a comparison with France’s luxury goods industry. Overall things are broadly the same as in last year’s research: The French industry’s revenues in 2015 were slightly higher than Italy’s, at just over 70 billion euros, or $73.5 billion, and their average profitability, at 17.8 percent in 2015, was also higher — perhaps an indicator that size does indeed make a difference.
Comparing both countries’ top 15 players, Italian firms’ revenues grew faster in 2011 to 2015 than France’s top 15 (up 30 percent, compared to 27.2 percent), although the trend reversed over the 2014 to 2015 period, when France’s top 15’s sales grew an average 10.2 percent compared to 8.9 percent for the Italian group.
As always, the French industry remains highly concentrated, with two groups — LVMH-Moët Hennessy Louis Vuitton and Kering — representing over half of industry sales (in Italy Luxottica and number two Prada represent less than one-fifth of overall industry revenues). But Italy’s top players are more capitalized and liquid, which is no bad thing if the industry’s prospects should suddenly tank.
In a final slide, titled “And if we were in the same family?” Mediobanca created a combined top 15 of the two countries’ largest players (always in terms of sales). While there is no prize for guessing who comes in first place (LVMH), nine out of the 15 were Italian compared with “only” six from France — something that may change soon if French firms keep on buying up their Italian peers, and not vice versa.