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TDFs Gobbling New Fund Assets: Morningstar

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Nearly a third of net new assets in firms with target-date funds in 2013 came from TDF inflows, according to Morningstar’s 2014 target-date series research paper released on Tuesday.

For T. Rowe Price, it’s even more. More than 90% of the firm’s total $8.5 billion in net new mutual fund assets in 2013 were gained from its target-date series’ $8.1 billion in net new assets (excluding money market flows). Roughly half of Fidelity’s new assets came from TDFs.

Even for firms with smaller target-date series, like J.P. Morgan and American Funds, TDFs made up a significant portion of their parent firms’ sources of new assets.

“J.P. Morgan’s $7.4 billion in new target-date assets, for instance, represented more than a third of the firm’s net new assets in 2013,” the study said. “American Funds’ $2.3 billion in net new target-date assets helped soften the impact from the firm’s overall $13.0 billion in outflows that year.”

The target-date market overall saw a rise in net flows, with a 10.5% organic growth rate in 2013. The study reported 20 of 36 target-date mutual fund firms with growth rates greater than the overall industry’s. According to the annual study, target-date mutual funds held more than $650 billion in assets as of March 31, thanks to the more than $50 billion in new flows in 2013 and combined with an additional $18 billion in new assets in 2014’s first quarter plus market appreciation.

“Those figures underscore not only how ubiquitous target-date funds have become to individuals saving for retirement, but also their central role to many fund companies’ business prospects,” wrote Janet Yang, Morningstar’s target-date series strategist and lead author of the study, in her report summary. “With echo boomers — a group often anecdotally noted for embracing the set-it-and-forget-it nature of target-date funds — beginning to enter their peak earning period, investors and industry watchers should expect those numbers to continue growing in the years to come.”

More on this topic

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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