4Q 2019 AMVR Cost-Efficiency Analysis

I apologize for the delay in posting the 4Q 2019 AMVR Cost-Efficiency Analysis. I have been involved in a legal battle involving my investor advocacy/education blog, “CommonSense InvestSense.” Fortunately, the matter has been resolved and the blog is back online.

As you can see, there has been little change in the AMVR grades for the top non-index mutual funds in “Pensions & Investments” annual ranking of the most mutual funds in U.S. DC plans. “P&I does not perform any qualitative analysis of the funds. They simply rank the funds in terms of total investments in the funds in DC plans.

I provide 4  sets of figures so that the readers can choose which figures they wish to use in calculating the Active Management Value Ratio™ (AMVR). In performing a forensic analysis for our clients, we  use the most demanding set of figures, correlation-adjusted costs (using Ross Miller’s Active Expense Ratio(, and risk-adjusted return (using Morningstar’s risk-adjusted methodology)

The AMVR is simply an adaptation of the common cost/benefit ratio, using the incremental cost/incremental benefit concept from Charles Ellis’ classic, “Winning the Loser’s Game.” Increasing, plaintiff’s attorneys in both ERISA fiduciary breach actions and general fiduciary breach investment actions are using both the correlation-adjusted and risk-adjusted numbers to calculate the damages in their cases.

In my opinion, the key takeaways from the 4Q analysis are:

  • The fact that only two of the six funds were able to produce a positive nominal return.
  • The fact that only one fund was able to produce a positive incremental return.
  • All of the funds had a high correlation of return to their benchmark, the Vanguard S&P 500 Index Fund (VIAFX) for teh large-cap blend funds, RWMGX and DODGX, and the Vanguard Growth Index Fund (VIGAX) for the remaining large-cap growth funds.

Funds with high R-squared numbers or low tracking numbers are naturally candidates for “closet index” status. Closet index funds are never prudent under the Restatement (Third) of Trusts’ fiduciary standards. most notably Section 90, comments b, f, and h(2). SCOTUS recognized the Restatement as the legal authority for addressing fiduciary issues in Tibble v. Edison International.

I believe that these AMVR numbers take on a whole new level importance after the Brotherston. The Restatement emphasizes two two basic fiduciary duties: cost-efficiency and risk management using effective diversification of a portfolio’s investments. With the burden of proof on causation shifting to plan sponsors, and arguable all investment fiduciaries, fiduciaries, who cannot show that their investment choices are cost-efficient face an uphill challenge in any legal action.

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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