Buffett says index funds better for most investors

By Jonathan Stempel

OMAHA, Nebraska (Reuters) - Warren Buffett said on Sunday most investors are better off putting their money in low-cost index funds, though he believes he can still outperform major market indexes.

"A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money," Buffett said at a press conference, a day after the annual shareholder meeting for his Berkshire Hathaway Inc. (BRKa.N: Quote, Profile, Research) (BRKb.N: Quote, Profile, Research) insurance and investment company.

Buffett, worth $52 billion (26 billion pounds) according to Forbes magazine in March, also said investors shouldn't flock to increasingly popular hedge funds, where managers typically receive a fixed fee plus a percentage of profits.

"The gross performance may be reasonably decent, but the fees will eat up a significant percentage of the returns," he said. "You'll pay lots of fees to people who do well, and lots of fees to people who do not do so well."

The Vanguard 500 Index fund VFINX.O, whose $120.2 billion of assets make it one of the largest index funds, has outgained a majority of its "large blend" peers in the last one-, three-, five- and 10-year periods, according to Morningstar Inc., a research firm.

Charlie Munger, Berkshire's vice chairman, said at the press conference that many investors actually fare worse in actively managed funds. He said many funds perform well when they're small, but struggle to keep up when investors chase that early performance, and pour in cash.

"Successful funds attract a massive amount of money, and the later performance typically gets mediocre," he said. "Then they keep publishing returns for the whole period for someone who started 20 years ago.... The reporting has falsehood and folly in it."

Buffett cited Fidelity Magellan FMAGX.O, a top-performing fund through the 1980s, but which has lagged S&P 500 over the trailing one, three, five and 10-year periods.