Toxic or Terrific: Evidence Based Investing with the Active Management Value Ratio 2.0

As an attorney, I put a great deal of emphasis on the value of evidence. Two of the most persuasive pieces of evidence regarding investing have to do with the consistent underperformance of actively managed mutual funds. For instance:

  • The most recent SPIVA (Standard & Poor’s Indices Versus Active) report, for the year ending December 31, 2014, reported that 87.23 percent of domestic equity funds as a whole underperformed their respective index.  The long term performance of all domestic equity funds was equally dismal, with said funds underperforming over both a five and ten year period, 80.82 percent and 76.54 percent respectively.
  • A study by Schwab Institutional concluded that 75 percent of new customer accounts being transferred to Schwab were unsuitable as being inconsistent with either an investor’s financial goals or financial needs.

And yet, despite this overwhelming evidence, according to the Investment Company Institute 2014 Fact Book, only 20 percent of the estimated $16 billion invested in domestic equity mutual funds as of the end of 2014 was invested in indexed equity mutual funds. One positive sign is that the Fact Book reports that sine 2007, there has been an outflow of approximately $659 billion, hopefully due to an increased education and awareness among investors. Hopefully this trend will continue, as the evidence clearly shows that the investment numbers should be completely opposite to what they are now.

The Active Management Value Ratio 2.0™

Investing can be very intimidating to investors, as many are hesitant to question investment “professionals.” Studies have shown that this is especially true of women and the elderly.

Which brings us to the role of the Active Management Value Ratio 2.0™ (AMVR). My purpose in creating the AMVR was to provide a simple and effective means of quantifying suitability and best interests for investors to help them protect their financial security against some of the questionable sales tactics practiced in the investment/financial services industries.

The AMVR is a simple cost/benefit analysis that is a basic concept in every introductory economics class. What makes the AMVR different is that the metric uses a fund’s incremental costs and returns as the analysis’ input data. The use of a fund’s incremental cost and return data is based on the concept that since index funds provide a means of reliably achieving essentially the market return with no additional market risk, the value added benefit provided by actively managed mutual fund, if any, is reflected in the incremental, or additional, return provided by the fund and the relative incremental, or additional, cost incurred to achieve such return.

The AMVR calculation simple and straightforward, requiring only the basic math skills of addition and subtraction. Incremental costs are calculated on the basis of a fund’s annual expense ratio and its turnover/trading costs, since studies have consistently shown that

The two variables that do the best job in predicting future [of mutual funds] are expense ratios and turnover. High expenses and high turnover depress returns….– Burton Malkiel “A Random Walk Down Wall Street”

AMVR calculations will result in one of three scenarios:

  1. the actively managed fund will fail to produce any incremental return for an investor, therefore providing no benefit to an investor;
  2. the actively managed fund will produce an incremental return for an investor, however the incremental costs incurred by the fund in producing the incremental return will exceed the incremental return, therefore providing no benefit to an investor; or
  3. the actively managed fund will produce an incremental return greater than the fund’s incremental cost, therefore producing a benefit for an investor.

Scenario three will result in further suitability analysis of the potential investment focusing on issues such as correlation of returns and potential “closet index” status.


Most of my career in financial planning and investments has  been centered on quality of investment advice issues, first as a compliance director/officer and then a the director of quality advice for the financial planning division of a major international insurance company. All along I recognized the need for the public to have a simple, yet effective means to evaluate the financial advice they receive from investment “professionals.”

The AMVR metric finally provides the public with a means to evaluate both the investment advice they receive and the person providing such advice. The AMVR can be used to evaluate investments options in both personal retail investment accounts and company retirement plans such as 401(k), 403(b) and 457 plans. The cost of calculating the AMVR is free, as the calculation process in the “white paper” section of this blog, and the information is freely available online at sites such as under the “Funds” tab.

Are your investments toxic or terrific? How valuable is your financial security to you and your family? Investors now have the means to privately evaluate both their investments and their financial advisers to determine if their investments and/or their advisers are truly serving the investor’s best interests.

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