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Sarah Pellegrinosarah.pellegrino@morningstar.com
Low-Cost Passive Series Led Target-Date Fund Growth, According to Morningstar’s Ninth Annual Target-Date Fund Landscape Report

CHICAGO, April 20, 2017 – Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced findings from the annual Target-Date Fund Landscape Report. The 2017 research report evaluates nearly 60 target-date series, presenting the latest industry developments and addressing investors’ frequently asked questions related to target-date funds in the areas of assets, flows, and the competitive landscape; investor experience; fees; industry changes; and the next frontier of target-date funds’ evolution. 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 target retirement date.

“Target-date funds have been on a remarkable growth trajectory, with assets climbing from roughly $125 billion 10 years ago to nearly $900 billion recently. What’s more, these funds have become the main source of new asset flows to many firms, accentuating their importance,” Jeff Holt, associate director of multiasset strategies research, said. “Meanwhile, target-date investors have increasingly demanded low-cost options, which has affected how target-date providers approach their funds and has caused many to branch out with additional offerings.”

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

  • Assets in target-date mutual funds reached an all-time high of $880 billion by the end of 2016, partially due to an estimated $59 billion in net inflows for the year. Approximately two of every three dollars directed to target-date mutual funds in 2016 went to series that invest predominantly in index funds.
  • The three largest target-date providers—Vanguard, Fidelity, and T. Rowe Price—collectively hold more than 70 percent of target-date mutual fund assets. However, Vanguard was the only one of these three to increase its market share in 2016; the firm had $37 billion in net inflows to its target-date funds in 2016.
  • Three of the 10 largest target-date fund managers saw net outflows in 2016. Fidelity’s target-date series had $3 billion in outflows in 2016, marking the third consecutive year of outflows. Principal and John Hancock also had net outflows of $500 million and $240 million, respectively, in 2016.
  • At the end of 2016, 12 firms offered more than one target-date series in an attempt to cater to different investor preferences. By contrast, no firm offered more than one series 10 years ago.
  • Target-date funds show a positive 1.4 percentage point investor return gap over the 10-year period through 2016, showing that investors have reaped benefits from making steady contributions to the funds.
  • Equity allocation generally determines how well a series’ results will compare with those of its peers, more so than broad distinctions such as active versus passive or open versus closed architecture. On average, each percentage point of additional exposure to equities added 6 basis points to funds’ returns.
  • Target-date funds aimed for those retiring around the year 2015 showed the greatest dispersion across asset classes.
  • The average asset-weighted expense ratio for target-date funds fell to 0.71 percent by the end of 2016, a notable decrease from 0.99 percent in 2011.

“The reality is that target-date funds must be competitively priced to thrive,” Holt said. “Everything equal, lower fees indeed provide a discernible advantage, but we’ve found that even similarly priced target-date funds can differ in potentially meaningful ways. In fact, target-date funds generally look the most different from one another at the retirement date, when their results matter the most.”

The research report is available here and an article summarizing the findings is available here. Additional articles and videos will be available on Morningstar.com® in the coming weeks.

Morningstar publishes a Morningstar Analyst Rating™ and reports for 22 of the most widely held target-date fund series, available on Morningstar.com® through a Premium Membership. 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.

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, 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 $200 billion in assets under advisement and management as of Dec. 31, 2016. The company has operations in 27 countries.

The Target-Date Fund Landscape Report was prepared by Morningstar’s Manager Research Group. 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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©2017 Morningstar, Inc. All rights reserved.


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