Investment Focus | PLANADVISER July/August 2017

A Milestone for TDFs

Target-date funds are on the verge of reaching $1 trillion in assets

By Matt Cirillo | July/August 2017

Target-date funds (TDFs) are fast approaching a major milestone: $1 trillion in mutual fund assets. At the end of June, assets stood at $985 billion, putting the mark within striking distance.

Coupled with favorable market conditions—the Standard & Poor’s (S&P) 500 is up 17.9% over the 12 months ended in June—net new flows into TDFs of $65.3 billion have contributed to a 21.5% increase in the funds’ assets over that same period.

While market share in this space is still dominated by the top three managers—Vanguard (33.6%), Fidelity (21.2%) and T. Rowe Price (16.5%)—other managers in the top 10 have displayed greater proportional growth. Led largely by BlackRock’s LifePath Index series, that firm’s TDF assets grew by 66.8%, while those for American Funds grew almost as much.

Vanguard’s flows of $43.5 billion for the period represent the largest absolute growth, translating to a relatively lower but still impressive 31.1% growth in  target-date fund assets for the firm. Still, they account for two-thirds of total target-date fund mutual fund net flows. In line with Vanguard, TIAA experienced healthy growth of 33.3%, though the firm saw this growth on a much smaller asset base, ending the period with $37.0 billion under management.

When viewed through the active/passive lens, Vanguard continues to stand atop the pack in sheer volume, with index series from BlackRock and TIAA exhibiting solid growth rates as well. On the active side of the table, American Funds had the largest increase in assets, with $20.6 billion of net inflows. These flows, at 62.0%, represent a growth rate more than three times that of other active managers such as J.P. Morgan (17.7%) and T. Rowe Price (16.1%).

American Funds’ recent success can be directly linked to the pricing and performance of the firm’s products. The manager’s lowest-cost, zero/zero, R6 class has displayed top decile performance across all vintages over the trailing three- and five-year periods at relatively low net expense ratios—35 basis points (bps) through 46 bps. While other indicators may suggest that active management has seen its day, this  target-date fund series is proof to the contrary.