Mr Buffett made his fortune through active money management, that is, active investments, whereas tracker funds rely on passive management. In the 2016 Berkshire Hathaway report Mr Buffett wrote: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsize profits, not the clients.”
“The point is well made, albeit by an active manager, and UK investors today have a wealth of low cost passive funds which can serve as the basic building blocks of a portfolio,” Mr Khalaf said.
“However there are some areas where active management can certainly add value, for instance in smaller companies and income investing.”
“While, as a whole, active managers might not be able to beat the market, there are some exceptional fund managers who have demonstrated an ability to outperform over the long term.”
Active investments can come with a hefty price tag as it’s no longer just the share one is buying but the management team needed to watch over it too.
Passive investments don’t require constant attention and generally have less associated risk but investing in them may well mean a stay for the long-haul.
This lacking flexibility is a big reason why many investors chose the active route instead, as if the market starts a downward spiral there is no ‘escape’ for an investment.
Tracker funds fall into the latter category, essentially replicating the effects of the current market by buying proportional shares of all companies in a specified index.
They are also a low-cost option in the stock market and can vary in risk to suit a portfolio.
“UK investors don’t need to choose exclusively between active and passive approaches, and would generally be sensible to have a mix of both in their portfolios,” said Mr Khalaf.
This diversification is also suggested by Mr Buffett, who has said: “‘Diversification is protection against ignorance.”
However, this ‘protection’ comes with a footnote; diversification must be done with conviction and a wealth of knowledge.
As Mr Khalaf warned: “UK investors should be wary of diworsification in their portfolios, particularly from closet tracker funds which hug an index and charge active fees for doing so.
“These funds are long term destroyers of wealth and should be weeded out in favour of low cost tracker funds, or truly active funds. Buffett’s point is, that if you are going to invest selectively, you should know enough to do it with conviction, and that is something UK investors should demand from their active funds.”
Ultimately, if active investments is the chosen route there are more questions to be answered in order to find your ideal strategy, first of which would be value versus growth.
As Mr Khalaf explained: “Buffett is well-known for being a value investor, a style which has been out of favour for the last ten years, and which is commonly contrasted with growth investing.
“But as Buffett remarks in his 1992 Chairman’s letter, ‘the two approaches are joined at the hip.'”
Speaking back in April, the analyst continued: “This observation is particularly pertinent at the moment, as since the arrival of vaccines, value stocks have started to outperform growth, bucking a decade long trend.
“Buffett’s perspective suggests that value and growth are not mutually exclusive at a stock level, and extrapolating somewhat, nor are they at a fund manager level.
“There is a spectrum, with some stocks exhibiting higher levels of value characteristics, and others more growth characteristics.”
On the growth and value approaches, Mr Buffett has said: “Growth is always a component in the calculation of value.”
Mr Khalaf commented: “Growth and value factors can each be expected to have their day in the sun, and indeed, the outperformance of one compared to the other can last for a long time.
“Investors should have a blend of styles along the value and growth spectrum, so that whichever way the wind is blowing, their portfolio is making ground.”