Assets in target-date mutual funds shrank in 2018, but the overall market grew, as providers gathered assets into low-cost alternatives like collective investment trusts (CITs) or new lower-cost target-date series that rely on passive funds.
Morningstar reports that assets in target-date strategies totaled more than $1.7 trillion at the end of 2018, with $1.1 trillion in mutual funds and approximately $660 billion target-date CITs.
The demand for lower-cost options propelled growth in target-date series offered as CITs, which typically cost less than mutual funds, according to the Chicago-based Morningstar.
In 2018, assets in target-date CITs totaled approximately $660 billion, a roughly $30-billion increase in a year when returns were negative.
“Price drove demand for a target-date fund in 2018,” the firm notes in its annual Target-Date Fund Landscape Report.
Nearly all the $55 billion estimated net flows to target-date mutual funds in 2018 went to low-cost series that held more than 80% of assets in index funds. Furthermore, assets moved to lower-cost share classes, bringing the average asset-weighted expense ratio down to 0.62% from 0.66% in 2017.
Target date market stats
- Assets in target-date mutual funds receded slightly in 2018 for the first time since 2008. Even though assets in target-date mutual funds fell to $1.09 trillion at the end of 2018 from $1.11 trillion at year-end 2017, they remain a popular option for investors, seeing an estimated $55 billion in net inflows from investors for the year.
- Catering to low-fee investor demand, multiple providers have launched less-expensive alternatives to their higher-priced legacy offering or made their strategy available in lower-cost vehicles like CITs. However, returns of a target-date provider’s newer, lower-cost series didn’t always outpace those of the legacy. Of the 10 target-date series that replicate a legacy offering but with lower fees, the since-inception returns for three failed to keep pace.
- Vanguard claimed nearly 40% of the target-date fund market at year-end 2018 and held roughly $650 billion in total assets across its mutual fund and CIT series.
- “Passive target-date funds” do not exist. The analysis of sub-asset-class glide paths identified significant differences in approaches—even between series that invest only in index funds—that are not apparent by examining strategic equity glide paths.
- Only 16 of the roughly 140 target-date fund managers invested more than $1 million in their series as of year-end 2018. Of that 16, four of the six managers who run multiple series invest more in a higher-cost, legacy offering that relies predominantly on actively managed underlying holdings.
The landscape report is available here.
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.