Recent Morningstar research has TDF providers popping the bubbly.
The Chicago-based research firm released findings from its 2015 Target-Date Fund Landscape Report.” According to the report, the asset-weighted average investor returns of target-date funds, which take fund flows into account to estimate a typical investor’s experience in a fund, are 1.1 percentage points higher than the funds’ average total returns—suggesting that, on average, target-date fund investors are using the funds effectively. Other finding include:
- Flows to target-date funds accounted for more than 30 percent, on average, of the overall net new inflows to their respective fund firms in 2014. In total, target-date funds represented approximately 8 percent of these firms’ total mutual fund assets as of December 2014.
- Target-date mutual fund assets surpassed the $700-billion mark at the end of 2014 and investors added $50 billion in net new assets into the funds during the year. However, for the first time in the past decade, organic growth was in the single digits at 8 percent, compared to 10.5 percent in 2013.
- Amid the market’s overall positive performance in 2014, longer-dated funds aimed at younger investors—with comparatively higher equity stakes—beat shorter-dated funds meant for investors closer to retirement. For example, the typical 2050 target-date fund, which had an average equity allocation of almost 90 percent, gained approximately 1 percentage point more than the average 2015 target-date fund, which had close to a 40 percent equity stake, in 2014.
- Vanguard became the industry’s largest target-date mutual fund provider in July 2014, unseating Fidelity from its 16-year reign. Together with T. Rowe Price, the three providers account for 71 percent of the industry’s assets.
Janet Yang, Morningstar’s director of multi-asset class manager research, said, “The positive gap between investor returns and total returns in target-date funds indicates those investors are capturing all of the funds’ total return, and more, thanks to the timing of their purchases and sales. Target-date funds are default investments for many retirement plans, and the steady inflows during the strong market environment in recent years likely explains this positive gap.”
Additional findings of the report include:
- Index-based target-date series narrowly outpaced actively managed peers in 2014, spurred by lower fees and above-average exposure to well-performing asset classes, such as U.S. stocks.
- The target-date industry’s asset-weighted expense ratio fell to 0.78 percent in 2014 from 0.84 percent in 2013, marking the sixth year in a row that investors paid less for target-date funds, on average.
- The industry average asset allocation glide path’s equity stake ticked up by as much as 4 percentage points in 2014 compared with the prior year. A glide path is a target-date fund’s predetermined asset allocation based on the number of years to the target date.
- Alternative investments are now more common in target-date funds, with non-traditional-bond and multi-alternative categories garnering the most attention. Target-date series also started adding stakes in managed-futures strategies for the first time in 2014.
- Only three managers invest more than $1 million of their personal assets in the target-date mutual funds of the series they manage. More than half of the industry’s target-date series are run by managers who have made no investments in the target-date funds they oversee.
“It’s not surprising that as the target-date industry has continued to mature, growth would slow. Nevertheless, target-date funds still notched the third-highest organic growth rate of any U.S. category last year, further cementing their status as the investment of choice for U.S. workers’ retirement savings,” Yang said.
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.
