Morningstar Magazine - June/July 2018 - 54

Spotlight: Packaged Investing

Only three other firms saw more than $1 billion
in estimated net flows to their target-date mutual
funds in 2017: TIAA Investments ($6.1 billion),
BlackRock ($4.6 billion), and State Street
Global Advisors ($2.7 billion). Target-date funds
have become increasingly important to TIAA
Investments, as they account for approximately
one third of the firm's mutual fund assets.
They also represent more than 40% of State Street
Global Advisors' mutual fund assets.
Despite the strong growth in target-date funds in
general, not all target-date providers saw
positive net flows in 2017. Seventeen of 41 firms
experienced negative net flows from their
target-date mutual funds in 2017, with T. Rowe
Price's roughly $9.5 billion representing the largest
outflow. (T. Rowe Price has stated that clients'
transition from its mutual fund version to
the collective investment trust version contributed
to the outflow.) Wells Fargo's roughly negative
$4.7 billion in estimated flows in 2017 marked
its third consecutive year of outflows. Amid that
trend, Wells Fargo jettisoned longtime subadvisor
Global Index Advisors from its legacy targetdate offering in July 2017, handing over the
management of that series to an in-house team.
Principal (negative $3.5 billion) and John Hancock
(negative $1.5 billion) were the other firms that
also saw more than $1 billion in estimated outflows
from their target-date mutual funds in 2017.
Fidelity serves as an example of a firm that has
been able to quell outflows from its target-date
funds. Fidelity made changes to its flagship
Freedom series, inserting strategies of its most
proven equity managers into the underlying mix
in 2012, revamping the series' glide path
in 2013, and then adding the ability to tactically
position the funds in 2014. The firm's net
outflows started in 2014 and peaked at $7.9
billion that year, but the net outflows have come
down each year since. The Freedom series'
improved results since implementing changes
have likely helped assuage concerns. Fidelity
remains the second-largest target-date
provider, with nearly $228 billion in target-date
mutual fund assets.

in the target-date fund space, but their collective
market share has edged down to 70% from
75% five years ago, and the relative position of the
three firms has changed. Since taking the top spot
from Fidelity in 2014, Vanguard has lengthened
its lead. Vanguard's 34% market share at year-end
2017 nearly matched Fidelity and T. Rowe
Price's combined market share of 35%. Fidelity has
lost market share since the end of 2012, when
it had nearly 33% of assets. Meanwhile, T. Rowe
Price's market share stayed between 15%
and 17% over the past five years. Notably, American
Funds has gained significant market share since
2012, up from 3% in 2012 to 8% at the end of 2017.

but for a lower fee, and subsequently attract more
flows than the older sibling series. BlackRock,
Fidelity, John Hancock, Schwab, TIAA-CREF, and
Voya each saw the highest estimated net flows
in their passive series in 2017.
Other firms have created series with more
exposure to index funds while keeping some
actively managed funds in the mix. These "blend"
or "hybrid" strategies also have found favor
with investors: The blend series from JPMorgan,
PIMCO, and Principal each saw positive
estimated net flows in 2017, while their active
versions experienced negative estimated net flows.

Estimated
NetWe
Yearly
Flows by Active vs. Passive Target-Date
2008-17
'You
Want It,
Got It'
A fewSeries,
providers
offered multiple glide paths to
Active
Passive target-date funds increasingly
Firms
that manage
address different levels of risk-tolerance, but Assets

have launched additional target-date series
in an attempt to meet investors' preferences.
Initially, firms came to market with just a
single approach to target-date investing, but since
2008, when Voya-then under the ING name-
launched a version of its original strategy
that invested only in index funds, several firms
have also started a second or even third targetdate series. A firm's least-expensive series
generally has been the most popular with
investors. Firms with multiple target-date series
often offer a version that invests predominantly in
index funds as an alternative to one that
2008
2009managed
2010underlying
2011 funds.
2012
holds actively
These 2013
Estimated Yearly Net Flows
versions typically follow the same general
asset-allocation approach as the legacy series,

investors haven't displayed a strong preference$80B
for
the new glide paths. While John Hancock's
Multi-Index Preservation series has slightly more
assets than its older Multimanager Lifetime
60
series, T. Rowe Price's Target Retirement series
represented less than 1% of the firm's target-date
mutual fund assets at year-end 2017.
40
Target-Date Fund Fees Continue to Decline

Asset-flow trends indicate that costs drive buying
20
decisions for target-date funds. As a result,
target-date fund providers remain under constant
0
pressure to keep their fees competitive.
2014
2015
2016
2017
EXHIB IT 2 shows that the average asset-weighted
expense ratio for target-date funds fell to 0.66%

EXHIBIT 2

Expenses Decline Funds are lowering fees, and investors are choosing cheaper
share classes.
Target-Date Funds' Average Asset-Weighted Expense Ratio, 2009-17

1.2%
1.03

1.02

0.99

0.91

0.87

0.79

0.73

0.71

0.8
0.66

0.4
0.0

The Big Three-Vanguard, Fidelity, and T. Rowe
Price-have long been the dominant players

Morningstar June/July 2018

2009

2010

2011

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

2012

2013

2014

2015

2016

2017

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