Reversing Buffett’s ‘big’ mistake

One scoop to start: Billionaire steel tycoon Lakshmi Mittal is preparing to leave the UK in response to a government crackdown on non-domiciled residents, making him one of the wealthiest entrepreneurs to move because of the tax reforms.

And one must-watch movie: Why governments are “addicted” to debt. This FT Film examines what some are calling the biggest issue in global finance today, the role of the “bond vigilantes”, and whether government borrowing could spiral out of control.

In today’s newsletter:

• Has Warren Buffett’s ‘big’ mistake finally turned the corner?

• Active ETFs: a lifeline for Europe’s struggling asset managers?

• Which funds have incinerated the most value over the past decade?

Berkshire Hathaway’s Precision Castparts unit has made a comeback

Warren Buffett has won a reprieve on a deal that the billionaire investor only four years ago described as a “big” mistake. 

Berkshire Hathaway last month disclosed that it believed the value of Precision Castparts, the aerospace parts maker Buffett bought in 2016 for $37bn, had recovered in value by nearly $2bn compared with its 2023 level to roughly $34bn. 

That brings Buffett, the so-called Sage of Omaha, closer to break-even on a deal that forced Berkshire to take a nearly $10bn writedown in 2021. 

The Berkshire unit has bounced back recently as the aerospace industry has recovered from the 2020 pandemic, and as Boeing, a big client, has again revved up production after problems with two flagship jets. 

Reflecting the reversal of fortunes, Berkshire’s auditor Deloitte & Touche cleared a critical audit matter related to Precision Castparts that had long hung over the sprawling conglomerate’s financial reports. 

Critical audit matters, known as CAMs, are a warning sign that an auditor had to make a complex judgment over something that could be material to a business’s financial accounts.

The CAMs were, in part, a reflection of the trouble Buffett has had with the company, which was hit hard by the pandemic as airlines paused aircraft deliveries to conserve cash. 

Sales fell dramatically in 2020, dropping 29 per cent to $7.3bn, its lowest level since 2012. Profits declined by nearly two-thirds, prompting the $10bn writedown tied to the takeover.

“Precision Castparts is far from my first error of that sort. But it’s a big one,” Buffett said as Berkshire disclosed the writedown, conceding that he had “paid too much for the company”. 

It’s not a bad place to be when even your “big” mistake reaches break even.

Active ETFs: turning outflows to inflows?

Middling asset managers in the UK and Europe are feeling the squeeze. Cost pressures and customer withdrawals from mutual funds are weighing on profit margins, leading fund groups such as Aberdeen, Jupiter and Schroders to try to up their game.

But the rise of so-called active exchange traded funds might help provide a lifeline, writes Emma Dunkley in this Big Read.

The active incarnation of ETFs allows fund managers to use their stock selection skills to try to beat the market, but in a product that is cheaper to run and easier for investors to buy and sell than their older mutual fund equivalents.

Fund managers who have long focused on selling funds run by stockpickers are now turning to active ETFs as another way to repackage their strategies with a twist, to bring in money and capitalise on rising investor demand.

“The risk is that if you sit there and don’t do anything, ETFs will continue to cannibalise the assets held in traditional funds,” says Matthew Beesley, chief executive of Jupiter, which suffered net outflows of more than £10bn last year.

But such fund managers already face stiff competition in Europe from US giants, including the likes of BlackRock, and the asset management arms of JPMorgan and Goldman Sachs. All three are among those to have used their dominant position to capitalise on a fledgling but rapidly growing European market.

If the US market is anything to go by, then converting products in Europe could prove to be successful. According to analysts at Bank of America, the typical mutual fund in the US suffered from $150mn of outflows two years before converting to an active ETF, at which point they attracted $500mn on average.

Others are more sceptical. One large attraction of ETFs in the US is their tax advantage, which is absent in Europe. And nor will a new structure be a panacea for the poor performance that many active funds have suffered. It’s just the proverbial “lipstick on a pig,” after all.

Will active ETFs help turn outflows to inflows? Email me: harriet.agnew@ft.com 

Chart of the week

Earlier this year, Morningstar collated the data on which US investment funds have created the most wealth for investors over the past decade. Booring. 

The list was naturally dominated by big index funds. The only outliers were a medley of Capital Group funds and Fidelity’s Contrafund, and they were in the mix simply because of their sheer size. Even a modest percentage return on a massive asset pile will produce a large nominal number of dollars of wealth. 

However, earlier this month the data provider turned its attention to the funds that had destroyed the most value over the past decade. This is a lot more fun, as our friends at FT Alphaville explore in this post, even if the list contains few surprises. (Hello, Cathie Wood’s Ark Invest.)

As you might have noticed, going short US technology stocks has been an extremely unsound idea over the past decade. ProShares’ SQQQ ETF is actually up 21.5 per cent so far this year, but that’s not nearly enough to dent the huge losses it accumulated in the decade up to the end of 2024. 

The rest are mostly a mix of gimmicky leveraged and inverse ETFs, which Alphaville is no fan of. The marketing is that these are short-term trading tools, but the reality is that the only people that consistently make money out of them are the fund sponsors. 

As Morningstar’s Amy Arnott and Jeffrey Ptak diplomatically put it: 

“ETFs have many things going for them — including low costs, tax efficiency, and typically a passive investment approach that makes them suitable building blocks for diversified portfolios — but they can have a dark side. For instance, some ETFs focus on narrowly defined sectors or themes, which can make them harder for investors to use successfully and can attract speculators.” 

Five unmissable stories this week

BlackRock has nominated Greg Fleming, chief executive officer of Rockefeller Capital Management, and Kathleen Murphy, former president of personal investing at Fidelity Investments, to stand for election as independent directors to its board. 

Asset managers, including Amundi, VanEck and WisdomTree, are rushing to set up exchange traded funds focused on Europe’s defence sector as a recent rally has prompted investors to rethink their stance on including controversial stocks in their portfolios.

Private credit is “not a bubble”, Apollo Global Management president Jim Zelter has said, adding that he did not think adverse economic conditions would trigger “huge losses” in a sector that has witnessed rapid growth in recent years.

Dutch pension funds are set to plough tens of billions of euros into risky assets in Europe as they move to a system without fixed benefits, supporting the continent’s efforts to attract investment and bolster its defence sector.

Meanwhile Norway should drop a ban that is preventing its sovereign wealth fund, the world’s biggest, from investing in defence companies such as Boeing, Airbus, Lockheed Martin and Honeywell, the two main opposition parties have said.

And finally

A new exhibition at the Design Museum in Kensington celebrates our enduring love of the water over the past 100 years. There are some wonderfully nostalgic moments in Splash! A Century of Swimming and Style, from that Pamela Anderson Baywatch swimsuit to a selection of eye-catching men’s Speedos from the 1980s, and Hunza G’s iconic crinkle fabric.

28 March — 17 August 2025, designmuseum.org