A new Morningstar report is doubling down on its prediction that collective investment trusts (CITs) will overtake mutual funds in 2024.
The firm’s latest Target-Date Strategy Landscape Report found that in 2023, 67%—or $104.5 billion—of net inflows into target-date strategies went into CITs, for a total of $156 billion. Net flows increased year-over-year, for a record high of $3.5 trillion.
According to Morningstar, CITs now represent 49% of the market and are on pace to overtake mutual funds as the most popular target-date vehicle in 2024.
“Investors in target-date strategies largely experienced positive returns in 2023, after the market turmoil of 2022. Low fees and research-driven glide paths continue to make target-dates a great tool for hands-off investors to save for retirement,” said Megan Pacholok, senior manager research analyst at Morningstar. “This year, we saw target-date CITs continue their momentum, and we expect them to surpass mutual funds as the most popular target-date vehicle by the end of 2024.”
The findings represent a growing trend predicted by Morningstar in the past. In 2023, the firm issued a report highlighting the ongoing adoption of CITs and predicted its positioning as the leading preferred vehicle in the near future. Other data from Sway Research in 2023 also forecasted future growth for the investment vehicle, after findings showed that CITs grew an average of 15% compared to 6% for mutual funds within a five-year window.
Adoption of the investments is only expected to increase in the future, as The Expanding Access to Capital Act, which would authorize the use of collective investment trusts in 403(b) plans, heads to the Senate for passage. The American Retirement Association, the Insured Retirement Institute and the Investment Company Institute have all expressed support for the bill.
Investment management firms are also taking advantage of the momentum, with Fidelity last year announcing it would expand its target-date fund (TDF) lineup to include 14 CITs. Fidelity’s fourteenth annual Plan Sponsor Attitudes survey had found that within the past two years, the most notable enhancements to workplace benefit plans include an increased number of CITs (29%) and offering CITs for the first time (28%).
Other findings
Additional findings from Morningstar’s latest report include:
- The five managers with the largest share of target-date assets collectively hold around 80% of the total market and have mixed splits between mutual fund and CIT assets. Vanguard, T. Rowe Price, and BlackRock have the majority of their assets in CITs, while Fidelity and American Funds have a larger asset base in mutual funds.
- Investors are favoring cheaper target-date options, which paired with firms cutting fees, helped push the asset-weighted expense ratio for target-date funds to 0.30% in 2023 from 0.32% the year prior. Funds in the lowest expense quintile saw substantial inflows while the four other quintiles experienced net outflows.
- Target-date providers have rounded out their product shelves by launching multiple series that have the same equity glide path but use all active funds, all passive funds, or a mix of both. After reviewing long-term performance trends, returns after fees are largely similar to one another despite the differences in underlying funds.
SEE ALSO:
- CITs to Overtake Mutual Funds as Most Popular Target Date Vehicle Within 2 Years
- Fidelity Expanding TDF Lineup with CITs
- CITs in 403(b)s Bill Headed to Senate
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
