Searching for a star fund manager

Warren Buffett once famously said: "if you have 2 per cent of your funds being eaten up by fees you're going to have a hard time matching an index fund in my view." All of which begs the question: do fund managers make a difference to the performance of an actively managed fund? And just what is the purpose of a fund manager anyway?

The question may sound impertinent to those with greater knowledge of how to pick and invest in stocks than the financial layman, but it is legitimate. After all, shouldn't retail investors reasonably expect a high proportion of the funds they invest in to at least contain a basket of stocks able to better the market and afford them a degree of security?

Buffett, suffice it to say, knows a thing or two about money and how best to maximise its potential. He has made compound returns of 20.46 per cent per annum for the last 45 years up to 2009, according to fund manager Terry Smith of Britain's Fundsmith.

Smith points out that if you had invested US$1,000 in shares of Buffett's Berkshire Hathaway - founded in 1965 - your investment would have been worth a whopping US$4.3 million by the end of 2009. Even allowing for inflation, that's active appreciation.

But Smith goes on to explain the really interesting part. "If instead of running Berkshire as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2 per cent of the value of the fund as an annual fee, plus 20 per cent of any gains, then of that US$4.3 million, US$4m would belong to him as manager and only US$300,000 to you, the investor," he says. "And this is the result you would get if your hedge fund manager had equalled Warren Buffett's performance. Believe me, he or she won't."