A new report from research and consulting behemoth Morningstar finds target-date funds reached an all-time high in 2015 in terms of inflows and steady investor contributions lead to better returns.
“Target-date funds continued their multiyear growth trend in 2015,” Jeff Holt, Morningstar’s associate director of multi-asset strategies research, said in a statement. “In the past 10 years, target-date fund assets have increased from $116 billion to $763 billion. As the default investment in many defined contribution plans, these funds have a clear runway for continued, steady growth.”
He added that target-date inflows have also acted as lifelines for the asset managers offering the funds, representing roughly half of the firms’ net new flows in 2015.
“Target-date investors have also benefited from good behavior,” according to Holt. “While investors in most other broad categories tend to buy high and sell low, target-date investors’ pattern of steady contributions and a hands-off approach has allowed them to realize higher returns.”
Morningstar’s research finds:
- Assets in target-date mutual funds increased to more than $763 billion at the end of 2015, up from $706 billion at year-end 2014. Target-date funds experienced an all-time high of $69 billion in positive net asset flows in 2015.
- Investor contributions drove asset growth in 2015 despite negative average returns for each Morningstar target-date category for the year. The average category loss was between 1.2 and 2 percent.
- Though the three target-date fund categories intended for retirees—Target Date 2011-2015, Target Date 2000-2010, and Retirement Income—saw outflows, the other eight target-date categories each saw net inflows in excess of $4 billion in 2015.
- Target-date funds’ annualized asset-weighted average investor return, which estimate a typical investor’s experience in a fund, was 0.7 percentage points higher than the funds’ average total returns for the past decade through the end of 2015. Meanwhile, most other broad investment categories showed weaker investor returns compared with total returns.
- Fidelity, T. Rowe Price, and Vanguard remain the three largest target-date providers, collectively holding 70 percent of target-date mutual fund assets. When target-date collective investment trust (CIT) assets are included, BlackRock jumps to fourth place from 11th place.
- In 2015, Vanguard widened its lead, taking 29.5 percent of market share, up from 27.3 percent in 2014. Fidelity’s market share declined from 26.6 percent to 23.8 percent, and T. Rowe Price’s share remained relatively flat at 17.3 percent.
- From 2014 to 2015, the average target-date series’ asset-weighted expense ratio fell from 0.78 percent to 0.73 percent. The John Hancock Retirement Living II target-date series had the largest decline, falling by 24 basis points.
- In 2015, 21 portfolio managers among 15 target-date series “ate their own cooking” by increasing their investments in their own target-date funds. Eight portfolio managers now invest more than $1 million each, an increase from three managers in 2014.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.