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Warren Buffett is, so far at least, thumping the competition in his famous $1-million (U.S.) bet that pits a simple S&P 500 index fund against a handpicked assortment of hedge funds. But the real surprise has been the investment that has proved to be the quiet superstar of the competition.

When Mr. Buffett made the bet seven years ago, he and Protégé Partners, a New York money manager, each agreed to put up $320,000 to be invested in a bond that would grow to $1-million in a decade's time. Mr. Buffett's assertion was that an S&P 500 index fund would do better than the average performance, after fees, of five hedge funds selected by Protégé. The two sides agreed that when the bet wound up in 2018, the $1-million from the bond would go to a charity of the winner's choice.

But as interest rates tanked after the financial crisis, the bond's value soared and by the fall of 2012 – less than five years into the bet – it was already worth almost $1-million. At that point, the two sides agreed to sell the bond and invest the proceeds in the stock of Mr. Buffett's Berkshire Hathaway Inc. The value of the pot has since grown to $1.68-million, according to Carol Loomis of Fortune Magazine, who has chronicled the bet since its inception.

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It's safe to say that no one involved in the bet expected this outcome. Back in 2008, the wager was seen as a test of the ability of very smart, carefully selected money managers to beat the collective wisdom of the stock market. Mr. Buffett's contention was that the high fees charged by the hedge-fund geniuses would more than offset any superior performance they could generate. The drag generated by their fees would pull their after-fee results behind a simple but extremely cheap index fund from Vanguard – or so Mr. Buffett predicted.

What no one foresaw was that the humble zero-coupon bond that was supposed to serve as not much more than the storage bin for the wager would wind up surpassing all expectations and zooming toward the $1-million target value before the betting period was even half done. Like all bonds, it shot up in value as central banks cut interest rates to boost economic growth. (Bond prices move in the opposite direction to interest rates.)

If you're scoring this at home, Mr. Buffett's S&P 500 index fund is now up 63.5 per cent over seven years, an average compounded gain of about 7.3 per cent a year, while Protégé's five hedge funds have gained an average of only 19.6 per cent, or 2.6 per cent a year. But the bond advanced about 9 per cent a year during the time it was held.

The strong performance of the overlooked bond demonstrates how investing performance since the financial crisis has been driven, to an amazing degree, by central bank policy. Money managers pride themselves on being able to detect cunning arbitrage opportunities and spot pockets of value; since 2008, though, the relentless cramming down of interest rates has made just about any financial asset look like a genius investment.

The broad, all-encompassing fall in rates and the resulting surge in prices for stocks and bonds makes it difficult for any investing manager to get too far ahead of the herd: By some estimates, fewer than 10 per cent of active managers beat their benchmarks in 2014.

Judging from the negative interest rates that are on offer in Europe, the trend to ever lower yields may have further to run. If so, investors in both bonds and stocks will continue to profit.

But the real test of Mr. Buffett's viewpoint will come when rates start to rise and everything goes into reverse, with higher rates acting as a drag on both stocks and bonds. That's when an active strategy may be able to spot pockets of opportunity. Even those of us who believe that Mr. Buffett is generally right, and that low-cost indexing beats active management over the long run, will be looking for shelter at that point.

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