Jeff Holt, CFA, is an associate director covering multiasset strategies on Morningstar’s manager research team.
This year's report highlights the major trends and developments in the target-date fund space by addressing some of the questions most frequently asked by investors, investment consultants, and the like. Here's just a sampling of the 20-plus questions covered in the report. The questions below come mainly from the "Assets, Flows, and the Competitive Landscape" section of the report.
Q: How many assets are in target-date funds? And how have flows been?
A: Target-date mutual funds saw another year of strong flows in 2016, though not quite as strong as seen in 2015. The inflows, coupled with the funds' generally positive returns, lifted assets to over $880 billion by the end of 2016.
Target-date funds' prominence continued to grow in 2016. As displayed in Exhibit 1, assets in target-date mutual funds reached an all-time high of $880 billion by the end of 2016, up from $763 billion the previous year. Assets in the funds have increased each year since 2008, when the financial crisis wreaked havoc across the board. The asset growth in 2016 came from the combination of positive returns--the average return for Morningstar's target-date fund categories ranged from 5.1% to 8.2%--and positive flows from investors.
Flows to target-date mutual funds in 2016 didn't match 2015's banner year, but they weren't far off. The funds saw an estimated $59 billion in net inflows in 2016, compared with 2015's $69 billion. The funds' common role as the default investment option in most defined-contribution plans led to the steady flows, as investors contribute to funds with each paycheck. The move to collective investment trusts from mutual funds explains, at least in part, why 2016's flows failed to keep pace with 2015's. For instance, Vantagepoint converted its Milestone mutual fund series to CITs in September 2016, and that series had more than $4 billion in assets at conversion. Also, Wells Fargo reported that a large portion of its $6 billion in outflows in 2016 was attributable to a large transfer from its mutual fund series to its CIT version.
Q: Are active or passive series of target-date funds attracting more assets?
A: Over the past couple of years, target-date series that invest exclusively in index funds have seen more flows than those that use actively managed underlying funds. As a result, the market share of active and passive series has converged.
Target-date series that hold only index funds--commonly called passive series--have attracted significantly more flows than ones that invest primarily in actively managed funds in each of the past two calendar years. (As emphasized in the 2016 Target-Date Fund Landscape report
, no target-date series is truly passively managed, as every target-date manager makes active decisions in building a glide path and selecting asset classes.) In 2016, passive series saw more than $40 billion in estimated inflows compared with $23 billion for active ones. This suggests that roughly two of every three dollars directed to target-date mutual funds that year went to a passive series. This built on the trend that emerged in 2015.
Passive target-date series haven't always had the edge on flows. As displayed in Exhibit 2, the positions were flipped in 2007 when active series reaped more than $40 billion in estimated inflows, whereas passive series only saw $16 billion in estimated inflows. Active series generally attracted more flows until 2012 when passive series saw slightly higher inflows. Only in the past couple of years have passive series had a sizable advantage.
As a result of investors' increased interest in passive series, the asset split between active and passive series has converged. As shown in Exhibit 3, active series' lead in terms of assets has dwindled over the past 10 years. At the end of 2006, active series held 83% of target-date mutual fund assets, but by end of 2016 they only accounted for 61% of assets. While active series still hold the lead, passive series are poised to keep closing the gap unless the prevailing trend with flows reverses.