You are right, based on measurements the AVR850 performed much better than the NAD. I used the NAD as an example because it measured so poorly, so it is easy to make the point that the answer to your question really depends on which specific AVR you will be using.
Now we know you are using the AVR850 for comparison, we can look at the known facts. If you look at the measured performance using CD direct, The AVR850 has relatively high THD+N. As most would likely agree, THD of even 0.1% may not be audible, but in a very quiet room you could hear noise (hiss/hum etc.) under certain conditions, example: listening to classical music during a quiet passage. The bench test results would seem to indicate that even with a best measured external DAC, you will not likely hear a difference, vs the Arcam's internal one using CD direct because the Arcam's preamp and power amp (more so the power amp) would be the bottlenecks anyway. I am not talking about the perceived sound quality, but just that in theory there wouldn't be audible difference between using the best external DAC and the Arcam's internal one for other factors including but not limited to the ones noted below.
Note: Even if you pair the Arcam with the best available power amp, external DAC still may not make an audible difference. That's because a) while the Arcam's internal DAC/preamp did not measured exceptionally well, but it is good enough such that the better specs/measurements of an external DAC will not likely result in audible improvements, and b) With the best available DAC IC, the Arcam's preamp will become the bottleneck, in terms of specs and measurable performance.
Arcam AVR850 Home Theater AVR Review | Audio Science Review (ASR) Forum
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