Morningstar Research Finds That Price Continues to Rule the Target-Date Fund Market

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)

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Morningstar, Inc.

May 09, 2019, 07:30 ET

CHICAGO, May 9, 2019 /PRNewswire/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today published its annual Target-Date Fund Landscape Report. The 2019 report, which evaluates more than 60 series of target-date funds, finds intensifying demand for low-fee options, with providers responding by offering inexpensive options like CITs or launching new lower-cost series that rely on passive funds. Additionally, Morningstar is rolling out enhanced Target-Date Fund Series Reports featuring new data points and exhibits to simplify the complexities investors face when evaluating target-date funds, such as the analysis of a series' sub-asset-class glide path, to insights on a series' management, to a revised methodology for performance attribution. The reports are set to launch in June and be released quarterly.

A target-date fund is an all-in-one investment that systematically shifts the asset mix of stocks and bonds in its portfolio according to a target retirement date. 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 report presents the latest developments in the target-date landscape, highlighting noteworthy considerations for target-date investors in five areas: Process, People, Performance, Price, and Parent.

"Target-date funds play a central role in the retirement success for many Americans since they often serve as the default investment option in their defined-contribution plan," said Jeff Holt, director of multi-asset and alternative strategies at Morningstar. "Though growth of target-date mutual funds stalled in 2018, the target-date market continues to expand into newer areas like CITs, reflecting retirement plan sponsors' desire to meet demand for the low-cost strategies. In this setting, we're excited to announce enhancements coming to our Target-Date Funds Series Reports that will help target-date investors identify how a target-date series stacks up in aspects that affect its future results, not just the price tag."

Key findings from Morningstar's annual target-date fund landscape report include:

The demand for lower-cost options propelled growth in target-date series offered as CITs, which typically cost less than mutual funds. In 2018, assets in target-date CITs totaled approximately $660 billion, a roughly $30-billion increase in a year when returns were negative.
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.
Price drove demand for a target-date fund in 2018. 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.
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. Morningstar publishes a Morningstar Analyst Rating™ and reports for 20 of the most widely held target-date fund series, available on Morningstar.com^® through a Premium Membership.

The enhanced Morningstar Target-Date Fund Series Reports and Morningstar's Analyst Ratings for target-date series are available in Morningstar Direct^SM, the company's global investment analysis platform for institutional investors, and in Morningstar Office Cloud^SM, Morningstar® Advisor Workstation^SM, and Morningstar® Analyst Research Center^SM, the company's investment planning and research platforms for financial advisors.

Methodology
Analysts determine an Analyst Rating for target-date series by evaluating five key pillars and assign the ratings on a five-tier scale of Gold, Silver, Bronze, Neutral, and Negative. The top three tiers are Morningstar Medalists and represent positive ratings. The Analyst Rating methodology for target-date series is available here.

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 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, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $210 billion in assets under advisement and management as of March 31, 2019. 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 or the fund's underlying securities' creditworthiness. This press release is for informational purposes only; references to securities in this press release should not be considered an offer or solicitation to buy or sell the securities.

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SOURCE Morningstar, Inc.