TDFs Gobbling New Fund Assets: Morningstar

While the trend of lower fees continues again this year for the fifth year in a row, the award for lowest-cost target-date series in the industry has changed hands. This year Fidelity Freedom Index series was crowned the lowest-cost target date series, unseating Vanguard’s Target Retirement series. At the end of 2013, the Vanguard series had an asset-weighted fee of 0.17%, compared with 0.16% for Fidelity Freedom Index.

According to Morningstar’s annual survey, the industry’s average asset-weighted fee has come down, from 1.04% in 2008 to 0.84% at the end of 2013.

“Part of that movement comes from a longer-term trend favoring lower-priced index-based investments within target-date funds,” Yang wrote.

  Other Key Findings:

• Fidelity, T. Rowe Price, and Vanguard continue to dominate the TDF industry — their combined market share represents nearly 75% of target-date mutual fund assets.
• Series with actively managed underlying strategies have underperformed during the last three years through the end of 2013, similar to the industry as a whole, according to Morningstar’s analysis.
• 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 study found that the majority of target-date series’ managers aren’t demonstrating conviction in their investment process through high share ownership.
• 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 target-date 2001-2010 category, which comprises the funds aimed at now-retiring baby boomers, has been the only target-date category leaking assets.
• Open-architecture series have shown no performance advantage over closed-architecture series, according to the study. Open-architecture series pay systematically higher fees to access nonproprietary managers, and those costs eat into returns.
• More experienced managers — whether at the target-date series level or within series’ underlying funds — have generally produced better results for target-date funds.
• The market turmoil of 2008 rolled off target-date funds’ trailing five-year returns by the end of 2013, leading to some significant reversals in series’ relative performance records. The study reported more equity-heavy series now have a clear lead during the past five years, while the downside protection offered by more equity-light series has increasingly faded into the rearview.

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 Read related coverage on ThinkAdvisor:

• Morningstar Finds TDF Fees Falling, Assets Growing
• Target-Date Funds Shrink in Number, but Popularity Is Growing
• 15 Best & Worst TDFs for 2015 Retirees
• Target-Date Funds: Winners & Losers of 2013