Morningstar Magazine - June/July 2018 - 53

Target-Date Investors Choose
Cheap and Passive
Nearly all new flows go into series that
invest predominantly in index funds.

TARGET-DATE LANDSCAPE

Jeff Holt and Heather Larsen

the average return for target-date fund Morningstar
Categories ranged from 8.8% to 21.3%-
and positive flows from investors. The estimated
$70 billion of net flows is an all-time high,
edging the previous high of $69 billion set in 2015
and is a notable increase from $59 billion
in 2016.

or Average fee ratings saw negative net flows
totaling $22 billion.
Winners and Losers in the Cost War

Mirroring trends across the fund industry, investors
in 2017 dramatically increased their preference for
target-date series that own passively managed
funds, according to research in Morningstar's 2018
Target-Date Fund Landscape report.
Nearly 95% of the $70 billion estimated net flows
into target-date funds in 2017 went to series that
invest predominantly-at least 80% of assets-
in index funds. (While these are commonly
referred to as passive target-date series, no series
is truly passively managed, as every targetdate manager makes active decisions in building
a glide path and selecting asset classes.)
This trend started in 2015 when passive targetdate series' net flows exceeded those for active
ones ( E X H I B I T 1 ).
Investors' increased preference for passive
target-date series over active ones in recent years
has narrowed the gap in assets between the
two types of series. While active series still have
more assets, passive series accounted for
42% of target-date mutual fund assets at the end
of 2017, up from 35% in 2014 and 24% in 2008.
Investors' flight to passive target-date series
appears to be driven by a demand for
low costs. Morningstar ranks fee levels of shareclass distribution channels. Share classes
of target-date funds that earned a Low
or Below Average fee rank received $79 billion
and $14 billion, respectively, in net flows in
2017. Those that earned High, Above Average,

Target-date funds continue to play an increasing
role in retirement success for many Americans
by serving as a common default investment
in defined-contribution retirement plans. Assets
in target-date mutual funds totaled roughly
$1.11 trillion at the end of 2017, up from $880 billion
at year-end 2016. The asset growth is remarkable:
Industry assets amounted to only $158 billion
at the end of 2008. The asset growth in 2017 came
from the combination of positive returns-

But as target-date funds continue to see strong
growth each year, only a handful of firms
have benefited. Vanguard has been the big winner
of new investments in recent years. It saw
a whopping $50.6 billion in estimated net inflows
in 2017, bringing its total target-date mutual
fund assets to an industry-leading $381 billion.
To put Vanguard's success into context,
its 2017 net flows exceeded the sixth-largest
provider's total assets in target-date mutual funds.
American Funds' $24.1 billion in 2017 estimated
net flows came in a distant second, but it
still represented a strong year. While American
Funds' $88 billion in target-date mutual fund
assets makes it the fourth-largest provider, it still
has significant ground to make up to catch
the next-largest provider, as its 2007 arrival to the
space was relatively late compared with the
other major players.

EXHIBIT 1

Passive Onslaught In 2017, nearly all net flows into target-date funds went to
offerings that predominantly use index funds.
Estimated Net Yearly Flows by Active vs. Passive Target-Date Series, 2008-17

Active

Passive

Assets

$80B

60

40

20
0
2008
2009
2010
Estimated Yearly Net Flows

2011

2012

2013

2014

2015

2016

2017

Source: Morningstar. Data as of 12/31/2017.

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Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2018
