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Expense Ratio And Manager Ownership, The Only ‘Armour’ Against Shortchanging Investors

Timothy Armour, who currently serves as the current chairperson and CEO of Capital Group, challenges Warren Buffett’s assertion that investors may gain better investment returns than a group of hedge fund managers by investing in an S&P 500 passive index fund. Buffett recently wagered $1 million for charity on this assertion. However, Mr. Armour believes that it is unlikely that Mr. Buffett will collect on his wager.

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Armour who holds a bachelor’s in economics, has over 30 years of investment experience, and began his career as an equity investment analyst; does agree with Buffett on one claim. He and Buffett both believe that investors’ portfolios are poorly affected by two factors: 1.) mutual funds are expensive 2.) they often perform meagerly in spite of their costs. He supports Buffett’s investment strategy of low cost, simple investments that investors should hold on to long term. However, Armour posits that the reason that many mutual funds yield poor long-run returns is in part due to the cost of high management fees and excessive trading. Furthermore, regarding the common “active versus passive” debate, Armour disagrees with the notion that passive index returns are the safest path. His overall point is that while index funds do have their place, they do not provide cushion for the investor when the markets are down.

Timothy Armour makes the point that investors of mutual funds should consider the expense ratio of the fund and the management and ownership of the fund. Funds with lower expense ratios tend to outpace their peers over time. Funds from investment firms whose managers invest more of their own money into their funds also tend to perform better over time.

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