One Hedge Fund Manager Answers Warren Buffet’s Challenge

Warren Buffet laid down the investing gauntlet when he declared that he would bet 1 million dollars for charity that a passive S&P 500 index fund. Would outperform a group of hedge fund managers. In a response written for CNBC, Capital Group Chairman Tim Armour (a hedge fund manager) took up that gauntlet with an explanation of his own.

Tim Armour concedes, at least, that Warren Buffet is likely to win that bet this year. However, he argues against giving up on his industry completely simply because not every hedge fund manager is actively working to up their game.

In another article, published in the Wall Street Journal, Tim Armour laid out the case for finding active managers who “earn their keep.” His example, of choosing back in the early 2000s between investing in Blockbuster or investing in Netflix, was based in part on the fact that his company does own stock in Netflix through their investment funds. He was making the case for actively managed funds, because with the right manager, an investment does not need to depend exclusively on hindsight to know where to go next.

Two of the major industry problems, Tim Armour explains, are high fees and excessive trading. Those can be an issue whether one is investing in an “active” hedge fund or a “passive” index fund. Generally speaking, passive index funds follow the major trends of the past, like Blockbuster Video and people normally going to a video store to rent movies. Equally generally, hedge funds bet on future growth and potential. Both carry certain risks and rewards, which should be judged on their own merits, not labels.

For long term planning, there is a place for both in the portfolio.

Tim Armour has over 34 years of experience in investing, and all of those have been with the Capital Group. He graduated from Middlebury College with a bachelor’s degree in Economics and joined the Capital Group originally with the Associates Program.

In 2015, he was elected Chairman of the Capital Group, and now serves as Chairman, Director and Principal Executive Officer of the company.