July 3, 2015

CONSUELO MACK: This week on WEALTHTRACK, are index funds raging out of control? Are these passive, low-cost funds actually a threat to retirement savings? Wintergreen Fund’s noted value investor David Winters sounds the alarm next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK, I’m Consuelo Mack. As we celebrate our tenth anniversary year on WEALTHTRACK we have been taking an in depth look at one of the biggest investment trends for the past decade, the huge migration of both institutional and individual investors from actively managed funds to passive, index- based ones, especially ETFs. As we have reported before, index funds now account for a third of fund assets up from 14% ten years ago.

And recently, Exchange Traded Funds, or ETFs, have seen the lion’s share of the fund flows. As Morningstar has reported, U.S. ETFs have more than two trillion dollars in assets compared to nearly 13 trillion for mutual funds. That means 14% of funds assets are now in ETFs up from a mere 4% ten years ago.

During the current six year bull market index funds have outperformed the vast majority of actively managed funds. In addition the cost benefits of index funds are considered to be overwhelmingly in investors favor, especially when compounded over time.

The asset-weighted expense ratio for passive funds was just 2/10 of a percent in 2014, compared with 8/10 of a percent for active funds. Even investors in active funds are opting for lower cost ones. During the past decade the lowest cost quintile of active funds received $1.07 trillion of the total $1.13 trillion of the net new flows into all actively managed funds. With better performance and lower costs it’s hard to find anyone critical of these developments, but we have one with us today. Not surprisingly he is an active fund manager.

He is David Winters, Chief Executive Officer of Wintergreen Advisers and Portfolio Manager of the Wintergreen Fund which he launched in 2005. Winters was nominated for Morningstar’s International-Stock Fund Manager of the year award in 2010 and 2011. He has been a WEALTHTRACK regular since the beginning because his traditional value –oriented, global approach worked for years. But the last five years have been rough with the fund underperforming its benchmark and Morningstar World Stock category.

I began the interview by asking Winters why he thinks the move to index funds is a dangerous market mania.

DAVID WINTERS: Well, the idea of index funds, Consuelo, is fine, but what’s happened is it’s become this universal truth, and people have poured more and more and more money into index funds and because the way it works is they’re capitalization weighted.

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