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.