The asset-weighted average investor returns of target-date funds, which take fund flows into account to estimate a typical investor’s experience in a fund, are 1.1 percentage points higher than the funds’ average total returns, according to the 2015 Target-Date Fund Landscape Report by Morningstar.
This suggests that, on average, target-date fund investors are using the funds effectively.
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Flows to target-date funds accounted for more than 30 percent, on average, of the overall net new inflows to their respective fund firms in 2014.
In total, target-date funds represented approximately 8 percent of these firms’ total mutual fund assets as of December 2014.
Target-date mutual fund assets surpassed the $700-billion mark at the end of 2014 and investors added $50 billion in net new assets into the funds during the year.
However, for the first time in the past decade, organic growth was in the single digits at 8 percent, compared to 10.5 percent in 2013.
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By GlobalDataAmid the market’s overall positive performance in 2014, longer-dated funds aimed at younger investors — with comparatively higher equity stakes — beat shorter-dated funds meant for investors closer to retirement.
For example, the typical 2050 target-date fund, which had an average equity allocation of almost 90 percent, gained approximately 1 percentage point more than the average 2015 target-date fund, which had close to a 40 percent equity stake, in 2014.
Vanguard became the industry’s largest target-date mutual fund provider in July 2014, unseating Fidelity from its 16-year reign. Together with T. Rowe Price, the three providers account for 71 percent of the industry’s assets.
Morningstar director of multi-asset class manager research Janet Yang said, "The positive gap between investor returns and total returns in target-date funds indicates those investors are capturing all of the funds’ total return, and more, thanks to the timing of their purchases and sales. Target-date funds are default investments for many retirement plans, and the steady inflows during the strong market environment in recent years likely explains this positive gap."
Index-based target-date series narrowly outpaced actively managed peers in 2014, spurred by lower fees and above-average exposure to well-performing asset classes, such as U.S. stocks.
The target-date industry’s asset-weighted expense ratio fell to 0.78 percent in 2014 from 0.84 percent in 2013, marking the sixth year in a row that investors paid less for target-date funds, on average.
The industry average asset allocation glide path’s equity stake ticked up by as much as 4 percentage points in 2014 compared with the prior year. A glide path is a target-date fund’s predetermined asset allocation based on the number of years to the target date.
Alternative investments are now more common in target-date funds, with non-traditional-bond and multi-alternative categories garnering the most attention. Target-date series also started adding stakes in managed-futures strategies for the first time in 2014.
Only three managers invest more than $1 million of their personal assets in the target-date mutual funds of the series they manage. More than half of the industry’s target-date series are run by managers who have made no investments in the target-date funds they oversee.
"It’s not surprising that as the target-date industry has continued to mature, growth would slow. Nevertheless, target-date funds still notched the third-highest organic growth rate of any U.S. category last year, further cementing their status as the investment of choice for U.S. workers’ retirement savings," added Yang.
A target-date fund is a mutual fund that automatically resets the asset mix of stocks, bonds, and cash equivalents in its portfolio according to a selected time frame.
