|Morningstar Announces Findings from 2010 Target-Date Series Industry Survey|
|• Despite unprecedented criticism and losses in 2008, target-date funds continue to be the retirement choice of a generation.|
• Investors have done better owning target-date funds than other types of mutual funds.
• In the wake of the market slide, many fund families have taken steps to reduce fund costs and lower risk.
• Disclosure and fund manager investment are still causes for concern.
CHICAGO, March 15, 2010—Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced findings from its 2010 Target-Date Series Industry Survey, which draws on Morningstar`s extensive research on 20 of the largest target-date series. The survey documents trends in target-date fund design, costs, and asset flows since the 2008 market downturn as well as target-date strengths, weaknesses, and returns to investors. It also offers an examination of target-date fund disclosure, and an analysis of the performance of fund series using proprietary, or in-house, versus independent managers in target-date fund construction.
“Target-date funds have been the subject of unprecedented regulatory, governmental, and media criticism in the wake of 2008`s market slide, but that has not deterred millions of investors from making these funds the centerpiece of their retirement savings. According to our data, more than $45 billion in new cash flowed into these funds in 2009,` said Laura Pavlenko Lutton, editorial director for Morningstar’s mutual fund research group. “Target-date funds have become the retirement vehicle of a generation, and for some good reasons. The funds have structural advantages over traditional mutual funds, including generally lower costs and dynamic asset allocation that automatically grows more conservative as investors age.`
Within the survey, Morningstar examined investor returns, which represent a typical shareholder`s experience. Investor returns reflect monthly flows in and out of funds, and the returns earned. With target-date funds, investor returns over the past three years exceeded the funds` total returns in every target-date category except for one, and far exceeded a shareholder’s experience owning a traditional mutual fund.
`Mutual fund shareholders usually reward funds that treat them well by staying put, and investors have been successful owners of target-date funds over the past three years,` Lutton added.
Investors may have turned a deaf ear to criticism of target-date funds, but many fund companies haven’t. Two general trends emerged in this year`s survey. First, Morningstar found there was a general move among the fund families in the survey to cut costs by lowering expense ratios or introducing cheaper indexed series. Second, several fund series took steps to reduce risk by lowering the funds` equity allocations, which caused steep losses in 2008. Others introduced or increased exposure to subasset classes that they hope will smooth returns.
`Lower fees directly benefit investors, but changes to the funds` equity exposure could leave the industry open to charges that it`s fighting the last market battle, and not positioning the funds correctly for the future. Indeed, some funds that were aggressively positioned in 2008 were whipsawed when they turned conservative prior to the market rebound in 2009,” Lutton added.
In the Target-Date Survey, Morningstar also examined whether `open architecture` series had a performance advantage. About a third of target-date series Morningstar evaluated features open architecture, or managers who are independent of the fund’s advisor. In the aftermath of the market downturn, some members of Congress and the media questioned series that use only proprietary managers, but the Morningstar survey showed no advantage or disadvantage to open architecture.
In addition, the survey covered disclosure and manager investment. Specifically, Morningstar examined whether fund companies provided the disclosure recommended by its own industry association, the Investment Company Institute, as well as details necessary to understand the target-date funds` potential risks and rewards. Morningstar also looked at fund managers’ level of personal investment in their funds to determine if the fund managers` own financial interests were aligned with shareholders`.
`Investors should remain concerned about the flimsy public descriptions of how target-date funds are run and the low absolute levels of manager investments in the funds,` Lutton added. `It’s critical for individuals to easily understand their target-date fund`s goals, strategy, and risks, and it’s important for fund managers to have some skin in the game. Many fund families still do not meet what we would consider to be basic levels of disclosure and manager investment.”
In addition to the Target-Date Series Industry Survey, Morningstar provides ratings and research reports for target-date fund series. Launched in September 2009, Morningstar evaluates target-date fund series on five components—People, Parent, Performance, Portfolio, and Price. People and Parent ratings are determined by both qualitative and quantitative measures of the funds’ management and stewardship processes. Performance, Portfolio, and Price ratings use quantitative measures to evaluate the quality of both the target-date funds and the underlying holdings in which they invest as well as the cost that investors must pay. Morningstar assigns one of five ratings for each component: Top, Above Average, Average, Below Average, or Bottom. Based on the five component ratings, each target-date fund series earns an overall rating using the same grade scale.
Morningstar Target-Date Fund Series Ratings and Research Reports are available in Morningstar® Principia®, Morningstar® Advisor WorkstationSM Enterprise Edition, Morningstar® DirectSM, Morningstar® Office, Morningstar® Site BuilderSM, and through licensed data feeds. Morningstar.com, the company’s Web site for individual investors, publishes the ratings and a modified version of the report.
To access Morningstar’s Target-Date Fund Industry Survey, please visit http://global.morningstar.com/2010TargetDateSurvey. For more information about Morningstar’s Target-Date Fund Series Ratings and Research Reports as well as a copy of last year’s Industry Survey, please visit http://global.morningstar.com/TargetDateReports.
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 Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 350,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 20 countries and minority ownership positions in companies based in two other countries.
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