In a February 27, 2017 article published on cnbc.com, Timothy Armour, Chairman and Chief Executive Officer of Capital Group, has challenged Warren Buffett’s claim that low-fee passive index funds will outperform actively-managed funds in the long run.
Warren Buffett has warned investors to avoid – active fund managers and to stick with low-cost index funds.
In 2007, Buffett bet $ 1,000,000 that a Vanguard S&P 500 index fund would beat five funds of hedge funds selected by Protégé Partners over the following 10 years.
It seems like Buffett will win the wager, as the S&P index fund has yielded a total return of over 85% through 2016, while the collective performance of the five funds of hedge funds has gained only 22% in that same period. The bet (the winnings will be donated to charity) goes through the end of 2017.
In his article, Armour agrees with Buffett that the best strategy is low cost, simple investments bought and held for the long haul. But he argues that passive index returns may not be the safe path for investors, as those funds are vulnerable to volatility and losses during down markets.
Armour advises that investors should look for funds with low expenses and high manager ownership, as those funds have consistently outperformed benchmark indexes. He points out that, in his firm’s 86-year history, its funds have averaged 1.47% higher returns annually than indexed funds.
Timothy D. Armour was named chairman of Capital Group in July, 2015, and he still manages money for the group, including the American Capital Income Builder fund.
Mr. Armour has nearly 34 years of investment experience, all with Capital Group. During his career he has covered global telecommunications and U.S. service companies. He holds a bachelor’s degree in economics from Middlebury College.