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Target-Date Funds See All-Time High in Positive Net Asset Flows in 2015; Steady Investor Contributions Lead to Better Returns, According to Morningstar Research

MORN | April 12, 2016

Eighth annual target-date fund landscape report also examines best practices in evaluation of target-date funds

CHICAGO, April 12, 2016 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today announced findings from its 2016 Target-Date Fund Landscape Report. The report evaluates 60 target-date series and covers a number of topics, including asset flows and the latest industry developments, as well as best practices for evaluating target-date series across each of the five pillars of the Morningstar Analyst Rating™—Process, People, Price, Performance, and Parent. A target-date fund is an all-in-one investment that systematically shifts the asset mix of stocks and bonds in its portfolio according to target retirement date.

"Target-date funds continued their multiyear growth trend in 2015. In the past 10 years, target-date fund assets have increased from $116 billion to $763 billion. As the default investment in many defined contribution plans, these funds have a clear runway for continued, steady growth. Target-date inflows have also acted as lifelines for the asset managers offering the funds, representing roughly half of the firms' net new flows in 2015," Jeff Holt, Morningstar's associate director of multiasset strategies research, said. "Target-date investors have also benefited from good behavior. While investors in most other broad categories tend to buy high and sell low, target-date investors' pattern of steady contributions and a hands-off approach has allowed them to realize higher returns."

Here are Morningstar's key research findings:

Assets in target-date mutual funds increased to more than $763 billion at the end of 2015, up from $706 billion at year-end 2014. Target-date funds experienced an all-time high of $69 billion in positive net asset flows in 2015.
Investor contributions drove asset growth in 2015 despite negative average returns for each Morningstar target-date category for the year. The average category loss was between 1.2 and 2.0 percent.
Though the three target-date fund categories intended for retirees—Target Date 2011-2015, Target Date 2000-2010, and Retirement Income—saw outflows, the other eight target-date categories each saw net inflows in excess of $4 billion in 2015.
Target-date funds' annualized asset-weighted average investor return, which estimate a typical investor's experience in a fund, was 0.7 percentage points higher than the funds' average total returns for the past decade through the end of 2015. Meanwhile, most other broad investment categories showed weaker investor returns compared with total returns.
Fidelity, T. Rowe Price, and Vanguard remain the three largest target-date providers, collectively holding 70 percent of target-date mutual fund assets. When target-date collective investment trust (CIT) assets are included, BlackRock jumps to fourth place from 11^th place.
In 2015, Vanguard widened its lead, taking 29.5 percent of market share, up from 27.3 percent in 2014. Fidelity's market share declined from 26.6 percent to 23.8 percent, and T. Rowe Price's share remained relatively flat at 17.3 percent.
From 2014 to 2015, the average target-date series' asset-weighted expense ratio fell from 0.78 percent to 0.73 percent. The John Hancock Retirement Living II target-date series had the largest decline, falling by 24 basis points.
In 2015, 21 portfolio managers among 15 target-date series "ate their own cooking" by increasing their investments in their own target-date funds. Eight portfolio managers now invest more than $1 million each, an increase from three managers in 2014.

Morningstar also highlights best practices in comparing and contrasting target-date series according to the Morningstar Analyst Rating and its five pillars, as well as guiding principles published by the U.S. Department of Labor's "Target Date Retirement Funds—Tips for ERISA Plan Fiduciaries" fact sheet. This section of Morningstar's report delves into the importance of evaluating risk exposure; glide paths; quantitative and qualitative Morningstar metrics; manager investment, tenure, and turnover; fee components and comparisons; investor returns; and target-date fund providers.

"Workers saving for retirement face numerous investment risks over their lifetime. Target-date fund managers must likewise balance risks as they build portfolios designed to serve as a single investment solution, and their approaches and strategies can vary widely. As a result, conventional evaluation practices don't always suffice," Holt said. "Our discussion of best practices when it comes to evaluating target-date funds surfaces important factors for investors to consider beyond performance figures."

Morningstar will host a webinar on Thursday, April 28 at 1:30 p.m. CT to discuss its target-date research findings. To register, please click here. The report is available here and an article summarizing the findings is available at www.morningstar.com/goto/targetdate2016. Additional articles and videos will be available on Morningstar.com in the coming weeks.

Morningstar publishes Morningstar Analyst Ratings and reports for 25 of the most widely held target-date fund series. Analysts determine an Analyst Rating for target-date series by evaluating the five key pillars and assign the ratings on a five-tier scale of Gold, Silver, Bronze, Neutral, and Negative. The top three tiers are Morningstar Medalists and represent positive ratings. The Analyst Rating methodology for target-date series is available here.

Morningstar's Analyst Ratings and in-depth reports for target-date series are available in Morningstar Direct^SM, the company's global investment analysis platform for institutional investors, and in Morningstar Office^SM and Morningstar® Advisor Workstation^SM, the company's investment planning and research platforms for financial advisors. The Analyst Ratings and one-page reports for target-date series are also available to individual investors on Morningstar.com^®.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on more than 510,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 17 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement and management as of Dec. 31, 2015. The company has operations in 27 countries.

Analyst Ratings are subjective in nature and should not be used as the sole basis for investment decisions. Analyst Ratings are based on Morningstar analysts' current expectations about future events and therefore involve unknown risks and uncertainties that may cause Morningstar's expectations not to occur or to differ significantly from what was expected. Morningstar does not represent its Analyst Ratings to be guarantees nor should they be viewed as an assessment of a fund's or the fund's underlying securities' creditworthiness.

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Media Contact:
Nadine Youssef, +1 312-696-6601 or nadine.youssef@morningstar.com