CHICAGO, May 12, 2020 /PRNewswire/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today published its annual Target-Date Strategy Landscape Report. The 2020 report examines investors' usage of target-date strategies throughout 2019 and amid recent market volatility, as well as key trends behind target-date adoption, how firms are adapting to meet investor preferences, and recent regulatory changes that may alter the target-date landscape going forward.
Target-date strategies are portfolios that combine stocks and bonds, systematically shifting the mix as they approach the specified target retirement date. The majority of target-date assets are in mutual funds, but collective investment trusts (CITs) have outgrown target-date funds in recent years to account for approximately 40% of the industry's market share. Unlike target-date funds, CITs are only available through qualified retirement plans, and asset-management companies can negotiate fees with each plan separately.
"Bear markets tend to test investors' resolve, and we saw this among normally stolid target-date investors. While target-date strategies performed largely as expected, some strategies nearer to the retirement date skidded to big losses, rattling investors," said Jason Kephart, strategist for the multi-asset and alternative strategies research team at Morningstar. "However, when we look at the landscape over a longer period, the long-term trends remain. Investors are opting for low-cost strategies and demanding flexibility and choice, which has increasingly led them to invest in CITs. Meanwhile, the passing of the SECURE Act in December 2019 could lead to potential inclusion of guaranteed income products in target-date strategies."
The Target-Date Strategy Landscape report is available here to download. Key findings from the report include:
During the turbulence of first-quarter 2020, most target-date funds performed in line with expectations, given their allocation to equities and diverse bond portfolios that often hold sizable stakes in corporate bonds. However, outcomes varied meaningfully for near retirees. Category average returns for the quarter ranged from -7% for the target-date retirement category to -20% for the target-date 2060+ category.
Investors in "through" series reaped the benefits of a decade-long bull market, but first-quarter losses in near-retirement target-date funds rattled investors. 2020 target-date funds that continue to lower the allocation to equities after the retirement date, or "through" series, fared worse due to their higher average allocation to stocks at retirement than funds that hold steady allocations once they reach the target date, or "to" series. The average 2020 "to" series lost 8.4% in the first quarter of 2020 versus an average loss of 10.6% in "through" series.
CITs are growing at a faster clip than target-date funds. In 2019, CITs received an estimated $69 billion of net inflows, or 10% organic growth rate. Target-date mutual funds had approximately $59 billion of inflows last year, but because of their higher starting asset base that equals an organic growth rate of 5.4%.
Target-date funds continued to feel downward fee pressure from investors in 2019, driven by investors choosing cheaper share classes. In 2019, $58 billion went into share classes that charge less than 0.20%, up from $51 billion in 2018. Share classes that fall more squarely in the middle and charge between 0.41% and 0.60%, saw net outflows of $3 billion in 2019. That's a reversal from 2018, when those share classes had $19 billion of net inflows.
CITs, which generally cost less than mutual funds, have benefited from the trend toward lower fees. The market share of CITs has grown to roughly 40% as of March 2020, up from less than 20% in 2014. The emphasis on CITs is also evident when looking at new series launches. Over the past three years, CIT series launches have outpaced mutual fund launches by nearly five to one.
The target-date industry remains top-heavy. The top five by assets represent 79% of target-date strategy assets, up from 78% in 2018. BlackRock and American Funds both gained market share during the year, while Vanguard and Fidelity held steady, and T. Rowe Price lost a bit of ground. Vanguard, whose series boast low costs, remains the most popular target-date series. Its market share at the end of March 2020 reached approximately 37%.
Following enhancements to the Morningstar Analyst Rating™ for Funds in November 2019, target-date series covered by Morningstar saw a wave of downgrades among more expensive share classes. Looking across all 28 target-date series that Morningstar covers, from October 2019 through March 2020, more than 25% of share classes fell from Medalist ratings to Neutral or Negative ratings.
Target-date series that use actively managed equity funds have only modest differences in factor exposures and relatively low active share compared to series that use passively managed index funds. While neither factor exposures nor active share are predictive of future returns, they can help investors set better performance expectations. Target-date funds that favor actively managed underlying funds have generally suffered from the trend toward low-fee options. The majority of those series' fees come from the underlying active-equity funds.
The passing of the SECURE Act in December 2019 could have meaningful ramifications for target-date funds going forward. The legislation eases the liability risks plan sponsors face when offering annuities to participants and opens the door for annuities within a target-date series' glide path. The inclusion of a guaranteed income option raises due diligence questions for investors, with a microscope on fees, contract structure, and impact on the glide path.
Morningstar today published a Fund Spy article on Morningstar.com that reviews the latest ratings for 28 target-date fund series that Morningstar covers, available here.
Morningstar Target-Date Fund Series Reports Morningstar Target-Date Fund Series Reports (the Reports) are designed to help individual investors, financial advisors, consultants, plan sponsors, and other interested fiduciaries make informed decisions when selecting a series of target-date funds. The methodology for the Reports is available here.
Morningstar Target-Date Fund Series Reports and Morningstar's Analyst Ratings for target-date series are available in Morningstar DirectSM, the company's global investment analysis platform for institutional investors, and in Morningstar Office CloudSM, Morningstar® Advisor WorkstationSM, and Morningstar® Analyst Research CenterSM, the company's investment planning and research platforms for financial advisors.
About Morningstar, Inc. Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $179 billion in assets under advisement and management as of March 31, 2020. The Company has operations in 27 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on Twitter @MorningstarInc.
Morningstar's Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar's Manager Research Group's current expectations about future events and therefore involve unknown risks and uncertainties that may cause such expectations not to occur or to differ significantly from what was expected. Analyst Ratings are not guarantees nor should they be viewed as an assessment of a fund's, CIT's or separately managed account's underlying securities' creditworthiness. This press release is for informational purposes only; references to securities or a separately managed account investment strategy in this press release should not be considered an offer or solicitation to buy or sell the securities or to invest in accordance with that strategy.