Markel Mocks ‘Brainless’ Index Funds, Sees Unhinged Markets

Markel Corp., the insurer that bought Alterra Capital Holdings Ltd. in 2013, loves keeping investment-management fees low. That doesn’t mean it’s going to settle for index funds.

Piling money into such baskets of securities is “a relatively brainless activity,” the company said in its annual letter on Friday. “We’ll try to use brains and common sense to avoid the excesses of index strategies while at the same time competing toe-to-toe with them on costs.”

Markel has prospered by making concentrated bets, including in CarMax Inc., Berkshire Hathaway Inc. and Prem Watsa’s Fairfax Financial Holdings Ltd. The company’s stock holdings returned 18.6 percent in 2014, according to the letter, which was signed by managers including Chief Executive Officer Alan Kirshner and vice chairmen Anthony Markel and Steven Markel.

CarMax, Fairfax and Warren Buffett’s Berkshire all gained more than 25 percent last year. Buffett seeks to look beyond short-term price fluctuations when he invests, an approach that Glen Allen, Virgina-based Markel favors.

“Markets periodically become unhinged,” the Markel executives wrote. “The fact that oil could sell for over $100 per barrel, and for less than half that price within a few short months, should be about all of the evidence you need to dismiss those who believe in efficient markets, or forecasting just about anything.”

U.S. crude inventories this month reached the highest levels in more than three decades, according to the Energy Information Administration.

‘Fat, Dumb’

The question of market efficiency has piqued the interest of asset managers such as Buffett, the second-richest man in the U.S., who has recommended index funds to amateur investors while concentrating Berkshire’s portfolio in a small number of companies. John Bogle, the founder of Vanguard Group Inc., the largest U.S. mutual fund firm, has faulted the money-management industry as “kind of fat, dumb, and happy.”

Markel also invests in bonds to back obligations on insurance policies. The executives said they will favor shorter-duration securities until interest rates climb.

“We just don’t think we are being paid appropriately to take the risks of owning long-term bonds,” they wrote. “So we won’t do it.”

Markel rose 1 percent to $772.58 at 2:19 p.m. in New York. It has advanced 13 percent this year after rallying 18 percent in 2014 and 34 percent in 2013.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE