Record flows paired with positive returns lifted assets in target-date mutual funds above $1 trillion last year, in comparison to $158 billion a decade ago.
“Target-date funds had another big year in 2017 with an all-time high of $70 billion in estimated net flows,” Jeff Holt, Morningstar’s director of multi-asset and alternative strategies team, said in a statement. “Even more remarkable than the funds’ strong growth, though, was seeing the heightened demand for low-cost, passive target-date series.”
Approximately 95 percent of target-date funds’ net flows went to series that invest predominantly in index funds, he added, “a sizable jump from roughly two thirds the previous year.”
The latest research report evaluated nearly 60 target-date series, presenting the latest developments in the competitive landscape, and highlights noteworthy considerations for target-date investors in five areas: Price, Performance, Parent, People, and Process.
TDFs have experienced more than $40 billion in net flows each year since 2008, according to Chicago-based Morningstar.
Fees for target-date funds continued their multiyear downward trend in 2017. The average asset-weighted expense ratio fell to 0.66 percent at the end of 2017, a notable decrease from 0.91 percent five years ago.
When target-date providers have launched additional lower-cost series to meet demand, those series generally have been the most popular, but not all have produced better performance results than older, more-costly ones.
Portfolios for different passive target-date series may diverge significantly, even more so than active series from a sub-asset-class glide path viewpoint.
While active and passive series generally have similar average equity glide paths, the average sub-asset-class exposures reveal more diversified bond exposures in active series than passive ones.
“Target-date investors clearly stand to benefit from lower costs, but it is critical that those selecting target-date funds—retirement plan sponsors or investors—know what’s behind the price tag,” Holt concluded. “Looking at sub-asset class exposures reveals meaningful differences between target-date series, even between ones considered passive, and those differences affect performance results more than fees.”
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.
