Bloomberg Businessweek USA 09.30.2019

◼FINA Bloomberg Businessweek September 30, 2019

23

● Hedgefundshavestruggledtoreplicate

BerkshireHathaway’ssuccessin reinsurance

It’sNot ThatEasy

ToBeLikeBuffett

BerkshireHathawayInc.’sWarrenBuffettissueda

warningabouteightyearsago:Reinsuranceisn’t

easy.Still,hedgefundmanagers—includingDavid

EinhornofGreenlightCapitalandDanielLoebof

ThirdPoint—haveborroweda bitfromBuffett’splay-

bookandgoneintoreinsurance,whichprovides

coverageforotherinsurers.

Buffetthadanadvantage.Heownedinsurance

companieswithinhisconglomerateandcould

investtheir“float”—thepremiumstheytakein

butdon’thavetopayoutinclaimsrightaway.

Thehedgefunds’approachisdifferent.Their

managershavesetupseparate,publiclytraded

reinsurancecompaniesthatinvestinthehedge

funds.Investorscanusethereinsurancestocks

asa waytogeta tasteoftheinvestmentsofthe

hedgefunds,whichthengetmoremoneytouse

andearnfeeson.

Thetrickistodowellinwritinginsurance

policiesandinvestingtheportfolio.Einhorn’s

THEBOTTOMLINE Bondindexesarebecomingmore

sophisticated,whichwillmakeit easiertoevaluatefixed-income

managers.Somewon’tsurvivethescrutiny.

reasonsarenotunlikethosethatoncekeptthem
inactivestockfunds.Theindustryhaspersuaded
peopletheyneedanactivemanagertonavigate
bondmarkets,manyofwhicharelessliquidand
moreopaquethanstockmarkets—andlesswell-
understoodbyordinaryinvestors.Andstarman-
agersstillburnbrightlyinthebondworld.
Thosesellingpointswillsoonevaporate,how-
ever.Andit maynottakea crashinthebondmar-
ket.Lookmorecloselyatwhathappenedtoactive
stockmanagers,andyou’llseeit wasn’tjustthemis-
erableexperienceof 2008 thatdrewinvestorsaway
fromthem.A burgeoningindustryofexchange-
tradedfundsbegantoofferinvestorsa widevari-
etyoflow-costindexportfoliosthatapproximate
popularstylesofactivemanagement.(I usesome
ofthesefundsinmyownasset-managementbusi-
ness.)Youhavea lotmorechoicethananS&P 500
fund. You can buy just the value stocks on the S&P.
Or the ones with high dividends. Or an index fund
that’s tilted to stocks with a variety of characteris-
tics that a stockpicker might favor, such as momen-
tum in recent price gains or high-quality earnings.
This allows investors to compare a manager to
an index fund that has a similar investing style.
Then they can discern how much of the manag-
er’s outperformance is attributable to skill and how
much to simply being in the right style at the right
time. In that light, even the great star managers
of the past might look a little more earthbound.
Lynch’s fondness for buying high-growth compa-
nies at a reasonable price, for example, was a win-
ning formula in the 1980s. But what if there had
been an index fund for that?
Bond markets are becoming increasingly auto-
mated and liquid. That’s paving the way for more
specialized bond index funds, such as those invest-
ing in lower-quality or more esoteric bonds than
the ones reflected in broad market benchmarks.
It’s telling that some of the best-known and
successful bond managers have eclectic styles—
it’s hard to stand out if you’re mainly investing
in Treasuries and high-quality bonds like every-
one else. Consider Dan Fuss of Loomis Sayles
Bond Fund. The fund easily outpaced the return
of its benchmark index, the Bloomberg Barclays
US Government/Credit Index, from its inception
in 1991 through August. But Fuss’s benchmark is a
poor proxy for his strategy. He has a penchant for
junk bonds and occasionally stocks, which are risk-
ier than most bonds. Fuss acknowledges as much—
he says existing benchmarks don’t capture what the
fund aims to do.
Jeffrey Gundlach’s DoubleLine Total Return
Bond Fund has also beaten its benchmark, the

broad-market Bloomberg Barclays U.S. Aggregate

BondIndex,bya widemarginsinceinception

in2010.Butthat,too,isonlypartofthestory.

Gundlachhaslongspecializedinmortgage-related

bonds. He tends to invest substantial amounts in

non-agency mortgage-backed securities, collater-

alized mortgage obligations, commercial MBS, and

other securitized debt.

Right now, it’s not easy to find a single index

fund you could compare either manager to. But

the more fine-grained passive bond funds get, the

more investors will be able to scrutinize manag-

ers’ performance and take their money elsewhere

if managers don’t measure up. Some skillful bond

managers will still beat the indexes. It’s just going

to get a lot tougher, and investors will be watching

the exit sign more closely. �Nir Kaissar, a colum-

nist for Bloomberg Opinion, is founder of asset man-

agement firm Unison Advisors

● Assetsin U.S. funds

◼Active

◼ Index

Domestic stocks

Bonds

$4.2t $4.3t

$3.7t

$1.5t