A Challenge To Warren Buffet’s View Of Activly Managed Funds

A 2015 article on the CNBC website describes a bet Warren Buffet has made. The “Oracle of Omaha” will donate $1 million to charity if he can’t beat the return on a group of hedge funds by investing in index funds based on the Standard & Poor’s index. Tim Armour, the article’s author, says Buffet will probably win his gamble. However, he takes issue with Buffet’s take on actively managed funds.

Armour starts with a brief recap of Buffet’s investment philosophy, which he mostly agrees with. Buffet’s “value investing” approach stresses doing careful research of individual companies. Investors should seek out stocks that are not overvalued, and put their money into those that have sound fundamentals. The goal is to invest in stocks for the long term. Actively managed mutual funds, on the other hand, don’t do as well as “passive” index funds on average. An index fund is a basket of stocks based on a market index. The index fund manager tries to match the overall market return offered by the index.

For Armour, the problem with index funds is that they provide no protection in a bear market. The fund will simply follow the market down. He doesn’t dispute Buffet’s overall view. On average, actively managed funds don’t do all that well, often because of mediocre management. Armour contends that choosing funds with low expenses and fund managers who invest their own money in the funds are key strategies investors can use to find well-managed active mutual fund investments.

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Armour is worth listening to. He became chairman and chief executive officer of the Capital Group in 2015. He joined Capital Group in 1983 after graduating from Middlebury College with a bachelor’s degree in economics. Hew has 34 years experience with the company.

Prior to becoming CEO, Armour handled global telecommunications and U.S service stocks as an equity investment manager. He started his career with Capital Group as an equity analyst in the Capital Group Associate Program.

Find more about Tim Armour: http://www.wsj.com/articles/you-dont-have-to-settle-for-average-investing-returns-heres-why-1476717440