In the fourth quarter of 2014, target-date funds had nearly $6.5 billion in asset inflows, about half the historical three-year quarterly average of $13 billion.
“The asset growth of the retail target-date industry continued to slow down over the past year, as the organic growth rate fell below 1% in the fourth quarter of 2014 compared to 3% in the first quarter of the year,” explained Jeremy Stempien, director of investments for Ibbotson Associates, a unit of Morningstar, in a report released earlier this week.
A key reason for the weak growth, he says, is that fewer new retirement plans are putting target-date funds into their lineups. Plus, more plans are moving assets into collective trusts or custom target-date strategies.
American Funds had inflows of $3.2 billion in Q4, as T. Rowe Price and Vanguard brought in $1.7 billion and $1.6 billion, respectively.
Vanguard has some $193 billion in target-date funds, followed by Fidelity with $187 billion and T. Rowe Price with $122 billion. “The three firms continue to dominate the market, as they collectively manage 72% of the industry’s assets,” Ibbotson Associates noted.
Total assets under management in retail target-date funds were $702 billion at the end of the fourth quarter, a jump of $15 billion from the previous quarter. This gain of 2% stems mainly from market returns.
During the final quarter of 2014 the average target-date fund gained 1.7%, trailing both the S&P 500 (4.9%) and the Barclays U.S. Aggregate Bond Index (1.8%). Still, target dates surpassed the returns of the Morningstar Lifetime Moderate Index in Q4’14, which were 1.2%.
For the full year, the average target-date fund improved 5.3%, topping the index’s 5.2% yearly returns but underperforming the S&P 500’s 13.7% gain and the Barclay’s bond index’s 6.0% improvement.
“Within U.S. equities, taking on risk paid off as small-cap equities beat its large-cap counterparts by nearly 5%,” explained Jeremy Stempien, director of investments for Ibbotson Associates, a unit of Morningstar, in a report released earlier this week.
“Small-cap growth stocks returned double digit returns with a 10.1% gain over the period, whereas large-cap growth equities returned significantly less with a 4.8% return. Value stocks saw similar outperformance with small-cap value returning 9.4% versus 5.0% for its large-cap value counterparts,” he noted.