The range of returns among Morningstar categories for TDFs was relatively narrow, with the average fund in Morningstar’s 2000-2010 category, the most conservative of the target-date group, gaining 10.68%, while the 2050+ category averaged a 14.45% return. By comparison, the S&P 500 Index returned 15.06% in 2010, and the Barclays Capital US Aggregate Bond Index was up 6.54%.
Longer-dated categories (those with target years of 2035 and later) averaged returns of 14% and better. Those gains were in line with the return of the broad stock market, which is encouraging considering that most funds in that range carry some fixed-income allocation. The long-dated target-date category returns exceeded returns for comparable Morningstar allocation categories, which incorporate balanced funds of different risk levels.
Shorter-dated funds unsurprisingly surpassed the bond benchmark, owing both to sizable equity allocations and investments in high-yield and other types of securities not included in the benchmark, Morningstar said. Differences were less extreme than in 2009’s rally for riskier securities or in 2008’s steep decline. The 10.68% gain in 2010 for the 2000-2010 category was slightly lower, however, than the Morningstar conservative-allocation category’s 11.19% return.
Target-date funds continued to attract investors’ retirement assets in 2010, according to Morningstar’s Target-Date Industry Survey. TDFs had net inflows of $47.5 billion in 2010, a small increase over the $45 billion net inflows of 2009. Total net assets in open-end target-date funds reached $341 billion.
On an organic growth-rate basis, however, the 2010 results are not quite as impressive as in years past, Morningstar said. The average organic growth rate for the target-date industry was 22%, off from 2009’s 39%, and well below the 2007 high of 76%. Compared with the meager results of both the equity (negative 2.5%) and balanced (1.84%) asset classes, the latter of which excludes target-date funds, target-date fund growth is still a bright spot.
As in previous years, most new cash in 2010 went to the longest-dated funds, in particular those with target retirement years of 2040 (34.6%) and 2045 (41.2%). All other categories, with the exception of the 2000-2010 funds, had growth rates in the range of 15% to 25%.Fidelity, Vanguard, and T. Rowe Price maintain their relative lock on industry assets. The Big Three control 76% of industry assets, down slightly from 81% in 2007. Fidelity has suffered the biggest absolute decline in market share, from 48% in 2007 to 37% at year-end 2010. T. Rowe stayed flat over that period, while Vanguard saw a market-share increase from 17% to 23%.
Most Popular QDIA
Morningstar’s Target-Date Industry Survey report noted TDFs owe much of their growth to their designation since 2006 as qualified default investment alternatives, or QDIA, in defined contribution plans. Morningstar’s Ibbotson Associates also has analyzed target-date flows compared with other QDIAs and found that target-date funds are the increasingly popular default choice.
Ibbotson found a widening gap over the past five years between the assets in target-date funds versus those in target-risk or managed-account vehicles. While all three investment types have continued to grow over that period, target-date funds have grown the fastest, from a net asset base that was smaller than target-risk funds in 2006 (prior to the passage of the Pension Protection Act) to a position where open-end target-date fund assets are more than double those of target-risk funds and nearly 5 times that of managed accounts.
While they are unlikely to repeat the explosive growth that followed their designation as QDIAs in 2006, there are still several factors that favor target-date funds’ continued growth, Morningstar contends. First, as default investments in retirement plans, assets flow in consistently and are less likely to leave. Second, there’s still more market share available as target-date funds have not yet saturated the QDIA market. Finally, they are relatively easy for investors to use because their assets are well diversified, which should limit volatility and make investors more likely to stick with them.The Morningstar report is here.