Warren Buffett just bet against passively managed funds in a very public way. Earlier this year Buffett made a million dollar wager that his investment in an S&P passive index fund will outperform several Wall Street fund managers. While Tim Armour has nothing but respect for Buffett, he has made the claim that Buffett is wrong on this one. Armour, the Chairman and CEO of Capital Group and the American Funds is one of the world’s largest money managers and knows quite a lot about the markets. Tim has been around for a while and has been a successful fund manager for a lot of years.
His quibble with Buffett’s claim basically comes down to the belief that not all fund managers are created equally. He will concede that yes, a passive index fund will likely outperform more than a couple current managers investment fund but that does not mean that a passive index fund is the right strategy. Armour, a successful fund manager himself, thinks that an active fund manager who cannot outperform market benchmarks should be low on the list of investors’ choices for active management. A good fund manager will be able to deliver returns that justify their fees and the way to do that is to outperform the index funds.
Active management that is competent and innovative in its strategy is always the best choice and Armour believes that his American Funds deliver in this regard. As more Americans near retirement age, and are increasingly reliant on their own retirement funds, Tim Armour believes that healthy returns are necessary to reach one’s financial goals prior to retirement.
Warren Buffett may well be writing a million dollar check to the charity of his choice by year end, but if Armour has his way, this wager will not encourage investors to flock to passive index funds. A well-managed fund that has healthy returns is the best tool to help investors reach their financial goals, whether they be retirement related or not. It will be interesting to see how the chosen managers do up against the S&P 500 index fund this year.
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