The first-quarter bear market, brought on by the coronavirus pandemic, is putting target date strategies to an unprecedented test.
Morningstar reported Tuesday that assets in target date strategies, which had reached $2.3 trillion at the end of 2019, fell to $1.9 trillion as of March 31, about a 17% decline.
The report said target date funds’ performance met expectations during the first quarter’s turbulence, given their allocation to equities and diverse bond portfolios that often hold sizable stakes in corporate bonds.
However, outcomes varied meaningfully for people nearing retirement. Category average returns ranged from -7% for the target date retirement category to -20% for the target-date 2060+ category. The average 2020 target date fund lost 10%.
“Bear markets tend to test investors’ resolve, and we saw this among normally stolid target-date investors,” Jason Kephart, strategist for Morningstar’s multi-asset and alternative strategies research team, said in a statement.
“While target-date strategies performed largely as expected, some strategies nearer to the retirement date skidded to big losses, rattling investors. However, when we look at the landscape over a longer period, the long-term trends remain.”
According to the report, 2020 target-date funds that continue to lower the allocation to equities after the retirement date — Morningstar calls these “through” series — fared worse because of their higher average allocation to stocks at retirement than funds that hold steady allocations once they reach the target date, or “to” series.
The average 2020 “to” series lost 8.4% in the first quarter, compared with an average loss of 10.6% in “through” series.
Collective investment trusts are growing at a faster clip than target date funds, Morningstar reported. In 2019, CITs received some $69 billion of net inflows, an organic growth rate of 10%.
Target date mutual funds had approximately $59 billion of inflows last year, but because of their higher starting asset base that came out to an organic growth rate of 5.4%.
In 2019, investors continued to exert pressure on target date funds by choosing cheaper share classes. Morningstar reported that $58 billion went into share classes that charge less than 0.2% last year, up from $51 billion in 2018.