2Q 2022 AMVR “Cheat Sheets”

At the end of each calendar quarter, I perform a forensic AMVR fiduciary prudence analysis on the non-index mutual funds within the top 10 funds in U.S. defined contribution plans, as ranked by “Pensions & Investments.” InvestSense provides both a 5-year and a 10-year analysis, using both a fund’s incremental nominal costs/returns and a fund’s incremental AER/correlation-adjusted costs and incremental risk-adjusted returns.

Studies have consistently shown that the overwhelming majority of actively managed mutual funds are cost-inefficient. A cost-inefficient mutual funds is never in an investor’s “best interest.” Therefore, a fiduciary that selects cost-inefficient fund would violate his/her fiduciary duty of prudence.

Past AMVR analyses have generally confirmed the studies that have found the majority of actively managed funds to be cost-inefficient. InvestSense uses a fund’s incremental AER/correlation-adjusted costs and incremental risk-adjusted return in assessing a fund’s Fiduciary Prudence Rating.

None of the funds qualified as prudent using the 5-year analysis. The Dodge & Cox Stock fund’s nominal nominal numbers would have qualified as prudent. However, the fund failed to produce a positive incrmental return using the fund’s risk-adjusted return.

The 10-year analyses did produce one fund, the Vanguard PRIMECAP Fund (Admiral shares), that qualified as a prudent performance using the fund’s adjusted costs and returns.

The results of the analyses continue to show the harmful effects of a combination of high incremental costs and high r-squared correlation numbers. A prime example of this is the T. Rowe Price Blue Chip Growth fund, where the combination of high incremental nominal costs (1.17) and a high r-squared number (98) resulted in the fund’s incremental correlation adjusted cost increased to 9.31. Very few actively managed will ever provide incremetnsl returns to cover such a deficit.

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About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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