Mohnish Pabrai on Index Investing

1% many not seem like much in a year when we’re up over 80%, it is very meaningful in down years (yes, we’ll see a few of those) or even years when we barely eke out a positive return. These expense ratio declines have been accomplished while upgrading our service providers to best in class – like engaging PricewaterhouseCoopers to do the audit and tax work. As assets under management rise, PIF3 and PIF4 will get to 10 basis points as well. As a comparison, the wonderful Vanguard S&P 500 Index Fund has over $66 Billion in assets and an expense ratio of 0.18% - nearly double of PIF2. PIF2 is cheaper than Vanguard’s fund until we get to a return above about 6.3% for investors. With virtually all other mutual funds and hedge funds, Pabrai Funds is cheaper until annualized returns are above 10%. With the 1/20 structure of most hedge funds, Pabrai Funds has lower fees and expenses until annualized returns are over 50% a year. Next Opening – February 1, 2004 for US Investors There are 2 funds open to new investors to add funds - PIF3 and PIF4. To invest in PIF3, one needs to be a non-US accredited offshore investor. Tax-exempt accounts like IRAs, Roth IRAs and US Family Foundations can now invest in PIF3 as well. The minimum investment to join PIF3 as a new partner is $100,000 and the next opening is on January 1, 2004.5

Additionally, with the merger of PIFI and PIF2, we now have a single fund with over $23 million in assets and growing which makes the expense ratio very reasonable. As we scale, it will decline further (as a % of the assets in the fund). 4. Investors with investments in other funds etc. can do an apples to apples comparison more easily.