Target-date strategies had $153 billion of net inflows in 2022, of which $121 billion—or 79%—went into collective investment trusts (CITs), furthering the transition from mutual funds as the preferred vehicle for target date funds.
That’s a key finding from Morningstar’s recently released annual Target-Date Strategy Landscape Report, which examines the latest trends across the target-date industry, including the target-date series that are gathering the most inflows, the ongoing adoption of CITs as plan sponsors’ preferred vehicle, and the continued critical role fees play when selecting a series.
Morningstar analysts use asset flow data to break down emerging trends and shifting investor preferences.
“Despite last year’s market turbulence, target-date strategies saw considerable inflows, especially into collective investment trusts,” said Megan Pacholok, senior manager research analyst at Morningstar. “To see target-date investors largely stay the course through the down market is a sign that these strategies are being used as intended—as long-term investments.”
The Morningstar report projects that CITs are on pace to overtake mutual funds as the most popular target-date vehicle in the next two years. These vehicles account for 47% of all target-date strategy assets as of the end of 2022, up from 45% in 2021.
Recent findings by Sway Research echo this forecast. Sway’s report, “The State of the Target-Date Market: 2023” found assets in CITs grew an average of 15% compared to 6% for mutual funds in a five-year basis. As a result, Sway predicts that assets in lower-cost CIT target-date funds (TDFs) will engulf mutual fund TDFs later in 2022.
This is a stark change, the Sway report said, considering that mutual fund-based target-dates held 63% of target-date assets compared to just 37% for CITs back in 2017. By the start of 2023, mutual funds held 52% of target-date assets, compared to 48% for CITs. The popularity has been driven by small- and mid-size plans, who value the lower costs that CITs bring compared to pricier mutual funds.
More key findings
More key findings from the report include:
• Total target-date assets fell to $2.82 trillion in 2022 from its record high of $3.27 trillion in 2021. Market depreciation drove the approximate 14% drop.
• The opportunity for environmental, social, and governance (ESG) target-date series has broadened, as the Department of Labor modified its guidance to allow ESG-focused strategies to serve as a qualified default investment option.
• Fees continue to influence target-date fund flows and investors prefer lower-cost options. The two cheapest quintiles of target-date share classes amassed $60 billion in 2022, and the three most expensive quintiles posted $28.5 billion in outflows.
• Vanguard Target Retirement collected the most net new money in 2022 when accounting for both mutual fund and CIT flows. At the end of 2022, 51% of Vanguard’s target-date assets were in CITs, marking the first time it surpassed the mutual fund version in assets.
• Plan sponsors faced litigation around performance in 2022. The lawsuits compared series to a small peer group of the best performers, which could potentially lead plan sponsors into performance-chasing and premature target-date strategy swapping to potentially avoid litigation.
The Target-Date Strategy Landscape Report is available here. Morningstar also recently published a Fund Spy article on Morningstar.com that reviews the latest ratings for target-date fund series that Morningstar covers, available here.
Five series earned the Morningstar Analyst rating of Gold:
• American Funds Target Date Retirement
• T. Rowe Price Retirement
• T. Rowe Price Retirement Blend
• BlackRock LifePath Index
• Pimco RealPath Blend
Seven series earned Silver ratings, another seven earned Bronze ratings, and 12 series received Neutral ratings.
SEE ALSO:
• CITs Dominate Mutual Funds on Target Date Assets for 2022
• Why CITs Continue to Climb: Wealth@wor(k) 2022
• Record Growth of CITs Spurs Rebound of Contributions to Target-Date Strategies