Charles (“Charlie”) Munger, Vice Chairman of Berkshire Hathaway and Warren Buffet’s long-time “partner” in business, delivered this speech in 1998 critiquing the investment practices of leading charitable foundations and endowments. He notes the eroding effects on investors’ returns due to the layers of fees which “can easily reach 3% of foundation net worth per annum”. These fees are not limited to investment advisory fees, but also include the effects of high turnover and transaction fees which tend to accompany complex asset allocations, commonly observed in the portfolios of many not-for-profit institutions.
Charlie’s advice to improve the investment practices of institutional investors is to reduce the cost of their investment management programs though indexing and investing in a limited number of high quality securities managed by experienced managers, and holding these securities for long periods of time. This approach resonates well with our investment philosophy at Houston Trust Company, and it is what we implement in the investment practices of our institutional, and individual clients, alike.
We have added a couple of charts which elaborate on Charlie’s point, which we have annotated in the original article.