Target-Date Mutual Funds Have Better Investor Returns Compared with Broad Range of Investment Categories, According to Morningstar Research

CHICAGO, April 7, 2015 /PRNewswire/ -- Morningstar, Inc. MORN, a leading provider of independent investment research, today announced findings from its 2015 Target-Date Fund Landscape Report. A target-date fund is a mutual fund that automatically resets the asset mix of stocks, bonds, and cash equivalents in its portfolio according to a selected time frame. Key findings about the industry's performance and growth in the past year include:

• The asset-weighted average investor returns of target-date funds, which take fund flows into account to estimate a typical investor's experience in a fund, are 1.1 percentage points higher than the funds' average total returns—suggesting that, on average, target-date fund investors are using the funds effectively.
• Flows to target-date funds accounted for more than 30 percent, on average, of the overall net new inflows to their respective fund firms in 2014. In total, target-date funds represented approximately 8 percent of these firms' total mutual fund assets as of December 2014.
• Target-date mutual fund assets surpassed the $700-billion mark at the end of 2014 and investors added $50 billion in net new assets into the funds during the year. However, for the first time in the past decade, organic growth was in the single digits at 8 percent, compared to 10.5 percent in 2013.
• Amid the market's overall positive performance in 2014, longer-dated funds aimed at younger investors—with comparatively higher equity stakes—beat shorter-dated funds meant for investors closer to retirement. For example, the typical 2050 target-date fund, which had an average equity allocation of almost 90 percent, gained approximately 1 percentage point more than the average 2015 target-date fund, which had close to a 40 percent equity stake, in 2014.
• Vanguard became the industry's largest target-date mutual fund provider in July 2014, unseating Fidelity from its 16-year reign. Together with T. Rowe Price, the three providers account for 71 percent of the industry's assets.

Janet Yang, Morningstar's director of multi-asset class manager research, said, "The positive gap between investor returns and total returns in target-date funds indicates those investors are capturing all of the funds' total return, and more, thanks to the timing of their purchases and sales. Target-date funds are default investments for many retirement plans, and the steady inflows during the strong market environment in recent years likely explains this positive gap."

Additional findings of the report include:

• Index-based target-date series narrowly outpaced actively managed peers in 2014, spurred by lower fees and above-average exposure to well-performing asset classes, such as U.S. stocks.
• The target-date industry's asset-weighted expense ratio fell to 0.78 percent in 2014 from 0.84 percent in 2013, marking the sixth year in a row that investors paid less for target-date funds, on average.
• The industry average asset allocation glide path's equity stake ticked up by as much as 4 percentage points in 2014 compared with the prior year. A glide path is a target-date fund's predetermined asset allocation based on the number of years to the target date.
• Alternative investments are now more common in target-date funds, with non-traditional-bond and multi-alternative categories garnering the most attention. Target-date series also started adding stakes in managed-futures strategies for the first time in 2014.
• Only three managers invest more than $1 million of their personal assets in the target-date mutual funds of the series they manage. More than half of the industry's target-date series are run by managers who have made no investments in the target-date funds they oversee.

"It's not surprising that as the target-date industry has continued to mature, growth would slow. Nevertheless, target-date funds still notched the third-highest organic growth rate of any U.S. category last year, further cementing their status as the investment of choice for U.S. workers' retirement savings," Yang said.

Morningstar will host a webinar on Wednesday, May 13 at 10 a.m. CT to discuss the findings. To register, please click here. In the 2015 Target-Date Fund Landscape Report, Morningstar manager research analysts evaluated more than 50 target-date providers. The report covers a number of topics, including asset flows and portfolio composition, as well as each of the five pillars of the Morningstar Analyst Rating™—Process, Price, Performance, People, and Parent. The report is available at http://mscomm.morningstar.com/TDLandscape. An article summarizing the findings is available at http://www.morningstar.com/goto/targetdate2015.

Morningstar publishes Morningstar Analyst Ratings and reports for 24 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. Morningstar manager research analysts assign the ratings 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 Direct^SM, the company's global investment analysis platform for institutional investors, and in Morningstar Office^SM and Morningstar® Advisor Workstation^SM, 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 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 14 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 $170 billion in assets under advisement and management as of Dec. 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.

Morningstar, Inc.'s Indexes department licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Morningstar, Inc. does not make any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.

©2015 Morningstar, Inc.  All rights reserved.

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Media Contact:
Nadine Youssef, +1 312-696-6601 or nadine.youssef@morningstar.com

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