Famous investor and founder of Berkshire Hathaway has placed a $1 million bet that passive index funds such as the S&P 500 deliver better returns than hedge fund managers. The bet will finish in 2017 and Mr. Buffet is on course to win.
Timothy D. Armour chairman and chief executive Capital Group acknowledges that Buffet is right about the large number of mediocre and costly funds that don’t delivery value to investors. However, Mr. Armour points out that the top five active funds such as American Mutual Fund and Washington Mutual Investor’s Fund have outperformed the S&P 500 over the last 40 years.
According to Mr. Armour the key to active investment is to find funds that deliver value to investors. He says most investors underestimate the risks in passive index funds investments. In 2016, Capital Group carried out some research and found only half of 1200 investors knew that passive index funds exposed them to 100 percent volatility and losses during bearish runs. Mr. Armour recognizes that there is no clear cut way of identifying the best hedge fund managers but there are two factors that are helpful in determining which funds are suitable high manager ownership and low expenses. Mr. Armour notes that funds with low fees and where management has significant funds alongside investors have outperformed indexes on average.
Mr. Armour graduated with and economics degree from Middlebury College. He started his investment career as an analyst for Capital Group Companies where he covered US service companies and global telecommunications. Over 32 years he has gained experience and has risen to become a leader in the investment industry. Adding to his role as CEO of Capital Group he is also the chairman of Capital Group Companies Management Committee and Capital Research Company. He is an experienced investor known for delivering good returns for his clients.