Target-date funds see record inflows in 2017: Morningstar

Percentage of inflows to low-cost, passive target-date series jumped by approximately 30%

Target-date funds see record inflows in 2017: Morningstar

The trend toward lower fees, one of the major tailwinds in the ETF revolution of recent years, has caused a record expansion in another investment-fund space.

US-based fund research firm Morningstar recently released the results of its 10th annual Target-Date Fund Landscape Report. In its analysis of almost 60 target-date series in 2017, the firm found that record flows and positive returns combined to lift assets above US$1 trillion, in comparison to US$158 billion a decade ago.

“Target-date funds had another big year in 2017 with an all-time high of $70 billion in estimated net flows,” said Jeff Holt, Morningstar's director of multi-asset and alternative strategies team. “Even more remarkable than the funds' strong growth, though, was seeing the heightened demand for low-cost, passive target-date series.”

According to Holt, around 95% of target-date funds’ net flows went to series that predominantly invest in index funds; in 2016, passive target-date series soaked up roughly two thirds of flows. The appetite for passive series was likely driven by retirement plan sponsors seeking lower costs.

Morningstar also noted a downward trend in target-date fund fees, with the average asset-weighted expense ratio falling to 0.66% at the end of 2017; five years prior, the figure was pegged at 0.91%. But while new lower-cost series launched by target-date providers have tended to be the most popular, not all of them outperformed older, more costly series.

The firm also noted that different passive target-date series may vary significantly in terms of their portfolio composition, even more so than active series from a sub-asset-class glide path viewpoint. And while active and passive series generally have similar average equity glide paths, active series tended to have more diversified bond exposures at the sub-asset-class level than passive ones.

“Target-date investors clearly stand to benefit from lower costs, but it is critical that those selecting target-date funds—retirement plan sponsors or investors—know what's behind the price tag,” Holt said. “Looking at sub-asset class exposures reveals meaningful differences between target-date series, even between ones considered passive, and those differences affect performance results more than fees.”