A new report finds that over the past 10 years, target-date fund assets have increased from $116 billion to $763 billion, and enjoyed an all-time high of $69 billion in positive net asset flows in 2015.
Morningstar’s 2016 Target-Date Fund Landscape report explains that investor contributions drove asset growth in 2015, despite negative average returns for each Morningstar target-date category for the year, which was a loss between 1.2% and 2.0%.
Though the three target-date fund categories intended for retirees (Target Date 2011-2015, Target Date 2000-2010, and Retirement Income) saw outflows, the other eight target-date categories each saw net inflows in excess of $4 billion in 2015.
Target-date funds’ annualized asset-weighted average investor return, which estimates a typical investor's experience in a fund, was 0.7 percentage points higher than the funds’ average total returns for the past decade through the end of 2015. Morningstar notes that at the same time, most other broad investment categories showed weaker investor returns compared with total returns.
That growth has been a lifeline of sorts for the asset managers offering the funds, according to Morningstar, which notes that TDFs represented roughly half of the firms’ net new flows in 2015.
Other Findings
Nearly half of TDF assets reside in three vintage-year funds — 2020, 2025, and 2030 — intended for investors within 15 years of their target retirement date.
Fidelity, T. Rowe Price, and Vanguard remain the three largest TDF providers, collectively holding 70% of target-date mutual fund assets. However, behind the “Big Three,” JPMorgan and American Funds have steadily gained market share, and both series have delivered some of the market’s best absolute and risk-adjusted returns, according to the report.
In 2015, Vanguard widened its lead, taking 29.5% of market share, up from 27.3% in 2014. Fidelity's market share declined from 26.6% to 23.8%, while T. Rowe Price's share remained relatively flat at 17.3%.
BlackRock’s target-date mutual fund assets don’t put it among the market’s top 10, but the firm stands within the top five players (from 11th to fourth place) when considering its $79 billion in CIT assets.
From 2014 to 2015, the average target-date series’ asset-weighted expense ratio fell from 0.78% to 0.73%. Morningstar says that the John Hancock Retirement Living II target-date series had the largest decline, falling by 24 basis points.
Cautionary Notes
However, the 84-page report explains that, as of 2015’s end, 21 underlying funds across 15 target-date series were closed to new investors, which the authors view as a potential indicator of looming capacity constraints. Additionally, the report notes that target-date series are often the dominant investor within their underlying funds, with what they termed the typical target-date series having about a 15% stake in its constituent fund, while noting that it’s common for TDFs to be the sole investors in those underlying funds. “Such a central role may tie target-date managers’ hands when it comes to replacing ailing underlying funds,” according to the report.
Of the 10 largest target-date mutual fund companies, target-date funds account for at least an estimated 20% of the mutual fund assets for T. Rowe Price, Principal, and TIAA-CREF. As such, the report notes, “flows — both in and out — can have a sizable effect on business results.”
Morningstar notes that in 2015, 21 portfolio managers (among 15 target-date series) “ate their own cooking” by increasing their investments in their own TDFs. Eight portfolio managers now invest more than $1 million each, compared with three who did so in 2014, according to the report.
