Kevin Duffy on the Dalbar effect

The dirty little secret of the asset management business is that the sophistication level of one’s clients is paramount.  If they constantly chase what’s hot and panic out of what’s not, all the hard work by the portfolio manager can be negated.  I refer to this pesky boat anchor as the “Dalbar effect,” after an annual study by Dalbar, Inc.  In it, they document how actual investor returns deviate significantly from published returns due to the poor timing of a firm’s clients.  

Aggressive marketing and client quality are inversely related, although Dalbar is unlikely to admit this to their institutional investor clientele.  BlackRock is no doubt an asset gathering machine, but where are the customers’ yachts?  According to my calculations, over the past ten years BLK’s all-important equity iShares franchise (32.5% of base fees in Q3) suffered a headwind (Dalbar effect) of 5.3% per year.  This effectively cut published returns in half.

~ Kevin Duffy, "Fade to Black," The Coffee Can Portfolio, p. 12, October 22, 2024