## The Active Management Value Ratio 2.0 Worksheet

I have had a lot of people ask me if could provide a simple worksheet that would allow them to quickly calculate the AMVR. Ask and ye shall receive. I have also provided an example of a completed worksheet. All you have to do is obtain the necessary data from an online source such as morningstar.com or yahoo.finance.com and you’re good to go.

The Active Management Value Ratio™ allows investors to evaluate an actively managed mutual funds in terms of its efficency, both in terms of cost and performance. WordPress will not let me insert a table, but the steps are simple:

(1) Obtain the current expense ratios and the turnover ratios for the actively managed fund in question and an appropriate benchmark, such as the Vanguard S&P 500 Index.
(2) Calculate each fund’s trading costs (See note below). Add each fund’s trading costs to its annual expense ratio to get the funds total expenses
(3) Subtract the index fund’s total expense ratio from the fund’s total expense ratio to obtain the actively managed fund’s incremental cost, the added cost of the actively managed fund.
(4) Obtain the 5-year annualized return for the actively managed fund in question and the benchmark used in Step 1.
(5) Subtract the index fund’s 5-year annualized return from the fund’s 5-year annualized return to obtain the actively managed fund’s incremental benefit, the added benefit, if any, provided by the actively managed fund. If the fund does not provide any incremental benefit, the fund should be excluded from consideration.
(6) Calculate the actively managed fund’s AMVR™ score by dividing the actively managed fund’s incremental costs by the actively managed fund’s incremental benefit.

Example:
Actively managed fund: Annual Expense Ratio – 1.00%, Annual Turnover Ratio 100%, and 5-Year Annualized Rtn – 20%

Benchmark Fund: Annual Expense Ratio – 0.17%; Annual Turnover Ratio 3%, and 5-Year Annualized Rtn – 18%

Incremental Cost = Active (1.00 + 1.20) – Passive (0.17 + .03)= 2.00
Incremental Return = 20.00 – 18.00 = 2.00

AMVR™ Score = 2.00/2.00 = 1.00

Therefore, an investor is effectively paying an expense ratio of 100% for the active management component of the actively managed fund.

Another way of looking at the analysis is by an analogy. Which is more prudent, paying \$20 for an annual return of 18 percent, or paying \$200 dollars for an annual return of 2 percent?

Yet another way to analyze the AMVR™ Score is to compare cost to relative contribution. In our example, 90 percent of the actively managed fund’s cost is only providing 10 percent of the fund’s return.

Bottom line, as to these two investments, it would be hard to justify an investment in the actively managed fund as a prudent investment in comparison to the passively managed fund.

Note: Mutual funds are not required to provide the actual trading costs of the fund. To calculate trading costs for the purposes of the AMVR™, we used a formula created by John Bogle. Bogle’s formula is (Turnover Ratio x 2) x 0.60. In our example, (100 x 2) x 0.60 gives us the 1.20 number. Another method of computing trading costs would be to simply take 1 percent of the stated turnover ratio. The calculation would simply involve multiplying the stated turnover ratio by .o1. In our example, 100 x 0.01 would result in a trading cost of 1.00 percent

 Annual Fees Total Annual Fees Annual Returns Actively Managed Fund 20.00 Annual Expense Ratio 1.00 Annual Trading Expenses 1.20 Total Active Expenses 2.20 Passively Managed Fund 18.00 Annual Expense Ratio 0.17 Annual Trading Expenses 0.03 Total Passive Expenses 0.20 Incremental Costs/Expenses 2.00 2.00

This article is neither designed nor intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.