Buffett Backlash: Fund Execs Criticize Sage’s Grim View of Active Investing

When Warren Buffett speaks, investors listen — and active fund managers often cringe.

The Oracle of Omaha released his much-anticipated yearly stockholder letter on Saturday, emphasizing the upside of passive S&P 500 index funds.

Passive investors will “do about average,” like the S&P, he says. Active investors will likely have the same results but with “far greater costs.”

Thus, the active investors’ aggregate results after costs “will be worse” than those of passive investors.

“Costs skyrocket when large annual fees, large performance fees and active trading costs are all added” into the equation, Buffett explained.

While he acknowledges that there can be exceptions to the rule, investors overall “will do better with a low-cost index fund” than with funds of funds or some other active investments, he argues.

Not so fast, fund managers and active asset managers counter.

First, says Capital Group Chairman & CEO Tim Armour, Buffett and American Funds have more in common than not.

“Mr. Buffett’s approach at Berkshire Hathaway has many similarities to how we at Capital Group have built the superior track record of the American Funds through bottom-up investing, rigorously analyzing companies and building durable portfolios,” Armour said in a note to investors recently.

Second, Capital Group doesn’t disagree with the data that Buffett and others pointed to in forming their views.

In fact, Armour says, his firm acknowledges that the average investment manager does not “outpace the market over meaningful time horizons.”

But, he adds, not all investment managers are “average.” The executive notes: “Just because the average person can’t dunk a basketball doesn’t mean that no one can dunk a basketball.”

Value of Advice, Active Funds

While Buffett admits there are exceptions to his argument, Armour argues that Capital Group’s American Funds are “one of them.”

Working with a fund manager with a history that shows he or she may produce better results “can make a very meaningful difference in an investor’s life,” the executive explains.

Select funds give investors the chance to “outpace the index,” and over time “the difference between the market average and even 1% better returns … can mean a much larger nest egg for a retirement that could last decades,” he added.

Armour also argues that research “dispels the common myth that it’s impossible for an investment manager to beat the index.”

Investors can pick active funds with lower costs, which “can significantly increase your success rate.” Furthermore, funds with managers who are invested in these investments have better records over various time frames.

“Of course nothing is certain, but a long history of delivering superior results suggests it’s not just about luck. Like Mr. Buffett, our firm is 86 years old,” Armour stated.