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Morningstar Announces Findings from 2014 Target-Date Series Research Paper

New asset flows into target-date mutual funds represent nearly a third of firms’ net new assets; Fidelity unseats Vanguard as lowest-cost target-date series in the industry

CHICAGO, July 1, 2014—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced findings from its 2014 target-date series research paper. Key findings about the industry’s overall growth include:
• Although the pace of growth in target-date mutual fund assets has leveled off in recent years, in 2013, organic growth of 10.5 percent helped target-date assets cross the $600 billion asset threshold. In the first quarter of 2014, an additional $18 billion in new assets flowed into the funds. Coupled with market appreciation, total assets were more than $650 billion as of March 31, 2014.
• For both large and small target-date series, net new assets flowing into target-date funds often represent a meaningful share of the asset management firms' new flows. At the end of 2013, flows into target-date funds amounted to nearly a third of those firms' new assets. This growth has allowed costs to fall for the fifth year in a row since Morningstar began assessing the industry.

”The target-date industry is maturing and stabilizing, but these funds continue to upend expectations in more ways than one,” Janet Yang, Morningstar’s target-date series strategist and lead author of the study, said. “Open-architecture target-date series, which pay systematically higher fees to access non-proprietary managers and should theoretically outperform closed-architecture series, have shown no such performance advantage. In addition, series that use tactical management, which allows managers to deviate from their asset allocation glide paths, have generally outperformed those that don’t, contradicting commonly held industry beliefs.”

Additional findings of the research paper include:
• The Vanguard Target Retirement Series has ceded its place as the lowest-cost series to the Fidelity Freedom Index Series. At the end of 2013, the Vanguard series had an asset-weighted fee of 0.17 percent compared with 0.16 percent for Fidelity Freedom Index.
• Fidelity, T. Rowe Price, and Vanguard continue their dominant hold over the industry's assets—their combined market share represents nearly 75 percent of target-date mutual fund assets.
• Morningstar's attribution analysis of target-date funds suggests that series with actively managed underlying strategies have underperformed during the last three years, through the end of 2013, which is similar to the industry as a whole.
• The vast majority of target-date series' managers aren't demonstrating conviction in their investment process through high share ownership. Only one manager—Hans Erickson of TIAA-CREF Lifecycle—has more than $1 million invested in a single target-date fund within the series he manages.
• The target-date series of asset management firms with a Positive Parent pillar rating have better long-term performance records than those of firms with Parent pillar ratings of Neutral or Negative. Morningstar’s Parent pillar rating evaluates the parent company’s corporate culture, fund board independence, manager incentives, fees, and regulatory history and is one of the five pillars of the Morningstar Analyst Rating™.

The 2014 Target-Date Series Research Paper is available at http://mscomm.morningstar.com/targetdatesurvey. An article summarizing the findings is available at http://www.morningstar.com/goto/targetdate2014.

Morningstar publishes Morningstar Analyst Ratings™ and reports for 22 of the largest target-date series. Analysts determine an Analyst Rating for target-date series by evaluating five key pillars—Process, Price, Performance, People, and Parent—in addition to unique quantitative metrics. The ratings are assigned on a five-tier scale: Gold, Silver, Bronze, Neutral, and Negative. The top three tiers are Morningstar Medalists, and represent positive ratings.

Morningstar's Analyst Ratings and in-depth reports for target-date series are available in Morningstar DirectSM, the company’s global investment analysis platform for institutional investors, and in Morningstar OfficeSM and Morningstar® Advisor WorkstationSM, the company’s investment planning and research platforms for financial advisors The Analyst Ratings and one-page reports for target-date series are also available to individual investors on Morningstar.com®.

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, and retirement plan providers and sponsors. Morningstar provides data on approximately 456,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 12 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $164 billion in assets under advisement and management as of March 31, 2014. The company has operations in 27 countries.

Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar analysts' current expectations about future events and therefore involve unknown risks and uncertainties that may cause Morningstar's expectations not to occur or to differ significantly from what was expected. Morningstar does not represent its Analyst Ratings to be guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness.

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©2014 Morningstar, Inc. All rights reserved.


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