Passive Fund Management is Not Always the Safest Bet

Tim Armour, the well-known fund manager of American Funds took to CNBC to write a response to Warren Buffett’s claim that passive fund management is most often the safest bet, and is also usually the smartest choice. Buffett claims that the majority of actively managed mutual and hedge funds are inefficient and that investors would be well served to choose a passively managed fund. In addition to stating that this is the safest way to go, Buffett also put forth the challenge that it is also the path that will bring the greatest level of returns. Tim Armour disputes this claim and respectfully disagreed with the Oracle from Omaha.

Armour does agree that there are a number of mismanaged funds that do get regularly out-performed by the market indices but he does not agree that this result is always the case. Yes, there are funds that charge exorbitant fees and that execute trades that are unwise and end up being costly, but Armour’s argument is that there are plenty of incidences where this is decidedly not the case. He believes that there are a good number of actively managed funds out there that consistently out-perform the markets.

While many people focus on the safety of passive funds, Armour brings up a very relevant point about the number of opportunities that are missed due to this passive management. In addition to being risk averse, passive funds can also create an environment where they are also growth-averse. By doing nothing but tracking the market, these funds can miss out on many smart trades that when executed in an efficient manner can create many significant returns. When active funds are properly managed without these inflated fees and nonsense trades, Armour believes that they will consistently beat the market.Warren Buffett is one of our nation’s very best financial advisors, and taking a position that does not agree with him 100% is not done very often, if at all!