2015 target-date fund landscape - morningstar,...
TRANSCRIPT
©2015 Morningstar, Inc. All rights reserved.
Jeff Holt, Analyst, Multi-Asset Class Strategies
2015 Target-Date Fund Landscape
Contents
gAsset Flows and Industry Overview
gPillars:
/Process
/People
/Performance
/Price
/Parent
2
3
Asset Flows and Industry Overview
Decelerating Growth in a Maturing Industry Net Assets, Estimated Net Flow, and Organic Growth Rates of U.S. Target-Date Mutual Funds, 2005-14
4
gContinued decelerating growth, now entering single digits: 8.0% in 2014 versus 10.5% in 2013
g Target-date mutual fund assets: $706 billion in 2014 versus $620 billion in 2013
gGrowth only behind those of alternative (10.9%) and sector equity (11.6%) funds
Slowly Decreasing Market Share Dominance 2014 Firm Market Share of Target-Date Mutual Funds
5
gVanguard, Fidelity, and T. Rowe Price account for 71% of the market, down from 77% five years ago
gVanguard takes market share lead; Fidelity loses 16-year reign
A Vital Role for Fund Companies 2014 Target-Date and Firm Assets and Net Flows
6
g Target-date funds have become crucial sources of new assets: one third of overall flows in 2014
g The inflows have helped offset outflows for actively managed funds
7
The Pillars: Process
The Goal Reasons to Evaluate Process
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gGain Insight Into a Target-Date Manager’s Philosophy
/Look at manager decisions
/Understand areas of focus
gPut Performance in Context
/Explain past performance
/Set future expectations
gHelp Investors Select the Best
/Understand and agree with the approach
/Focus on the longer-term potential in lieu of shorter-term noise
Equity Exposure Edges Higher Industry Average Strategic Equity Glide Path: 2014 Versus 2013
9
g Largest uptick—nearly 4 percentage points—occurred 20 years before the target retirement date
gGlide-path changes by BlackRock, Fidelity, and PIMCO contributed to the shift
Peeling Back Another Layer Industry Average Sub-Asset-Class Glide Path
10
Equity Take-Aways
gHome Country: Two thirds of equities stay in the U.S. compared with half for the MSCI ACWI Index
gMarket Cap: Large caps represent two thirds of U.S. equity, slightly less than the Russell 3000 Index
gEmerging Markets: Exposure falls roughly in line with the broad benchmark
Peeling Back Another Layer Industry Average Sub-Asset-Class Glide Path
11
Fixed-Income Take-Aways
gPlus Sectors: High-yield and foreign bond reach nearly 4% and 8% of the 2005 vintage, respectively
g TIPS in Retirement: Average TIPS exposure ramps up to 8% in the retirement phase
gCash Drag: Hovers between 4% and 9% of assets across the glide path
Gaining Insight: An Example Vanguard Target Retirement Sub-Asset-Class Glide Path
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g Limited exposure to high yield
gSignificant emphasis on TIPS in the retirement phase
gHeavy use of foreign bond
Gaining Insight: An Example Sub-Asset-Class Glide-Path Comparison: Vanguard Target Retirement vs. Industry Average
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gRelatively high stake in U.S. large cap; up to 10 percentage points above the average
gMore foreign-bond exposure than most
g TIPS allocation moves quickly from an underweighting to an above-average position in retirement
A Look Across All Target-Date Series Target-Date Series’ Average Position Versus Average Sub-Asset-Class Glide Path
(Subasset Class Percentage Points +/- Average)
14
gStill far from a consensus: 27-percentage-point gap in U.S. large-cap exposures
g Target-date managers gravitate to their firm’s strengths
A Look Across All Target-Date Series Target-Date Series’ Average Position Versus Average Sub-Asset-Class Glide Path
(Subasset Class Percentage Points +/- Average)
15
gEvery target-date manager makes active decisions, even for “Index” strategies
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Portfolio
The Rise of Alternatives? Number of Series Using Alternative Investment Mutual Funds, 2008-14
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gNot yet commonplace, but a growing presence
gNontraditional bond has the most traction
gManaged futures jumped on the map in 2014
Commodities: Old News? Number of Series Using Commodities Mutual Funds, 2008-14
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gCommodities have become fairly prevalent in target-date series; only five series used them in 2008, but now nearly half do
Commodities: Old News? Target-Date Assets in Commodities Mutual Funds and Index Return, 2008-14
19
g Target-date managers have pulled back exposure in midst of rocky performance for the asset class
Venturing Away From Home: Bonds Number of Series With World-Bond or Emerging-Markets Bond Funds and Annualized Three-Year Category and
Index Returns, 2008-14
20
gEmerging-markets bond funds are picking up steam within target-date funds; 18 offered in 2014 compared with just four in 2008
g The three largest target-date managers (Vanguard, Fidelity, and T. Rowe Price) each carve out dedicated exposure to international bonds
Venturing Away From Home: Stocks Percentage of Equity Portfolio Invested in Non-U.S. Companies, 2006-14
21
gManagers are shifting stocks abroad; the average 2040 vintage held 32% in foreign stocks in 2014 compared with 23% in 2008
gA general home-country bias still persists relative to the broad index
22
The Pillars: People
Manager Tenure: A Two-Pronged Analysis for Target-Date Series Manager Tenures for Underlying Funds and Series
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g Long-tenured managers are generally preferred at both series and underlying fund level
Keeping an Eye on Manager Departures Target-Date Series’ Manager Departures and Manager Longest Tenures
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g Fixating on the Series’ Manager Longest Tenure may not reflect turnover among less-experienced skippers
Series Managers’ Ownership Is Uninspiring Manager Ownership of Target-Date Funds, Series’ Highest Reported Ownership Level
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gMost target-date managers do not invest their personal assets in their series; 32 of the 57 series report zero investment in any vintage mutual fund
gA couple of caveats: 1) Teams may run multiple series; 2) teams may invest in non-mutual-fund vehicles
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The Pillars: Performance
Investors Use Target-Date Funds Correctly Total Return and Investor Return for Select Category Averages
27
g Target-date funds’ investor returns top their total returns by 1.1 percentage points
gSteady inflows—bolstered by being the default investment for many retirement plans—have helped amid the rising equity market
gNot all target-date series show the same outcome
Changing Tides, Changing Ranks Series’ Average Five-Year Return Percentile Rank Through 2011 and 2014
28
g The market environment may drive rank changes, but so does manager performance
g Lackluster performance ranks may spur outflows
Benchmark Difficulties: Measuring Relative Performance Count of Target-Date Series’ Benchmarks
29
gSingle asset class benchmarks (for example, S&P 500) are still commonly used in prospectuses
g There is still not a clear winner on a target-date benchmark, but S&P has taken the lead
A Single Type of Approach Fails to Provide a Distinct Performance Edge Trailing Returns by Investment Type and Series Architecture
30
gPassive target-date series—those that invest in index-based funds–topped active ones by 60 basis points in 2014, but they fall roughly in line over the long term
gOpen architecture series—those that seek external best-in-class strategies–haven’t demonstrated an advantage over closed architecture ones
31
The Pillars: Price
Fees Continue to Trend Lower Average of Industry’s Asset-Weighted Expense Ratio, 2008-14
32
g Fees have declined for six consecutive years, resulting in a savings of 0.26% over that time
g Two contributors: 1) Fee reductions; 2) investor shift toward low-cost offerings
Higher Market Share Keeps Costs Down Target-Date Series’ Market Share and Average Expense Ratio
33
gSeries with greater market share tend to have lower fees
Index-Based Series Offer the Lowest Fees Percentage of Target-Date Series Actively Managed and Average Expense Ratio
34
gSeries that invest exclusively in index-based funds are the industry’s low-cost leaders
gNot all index-based strategies are a bargain
35
The Pillars: Parent
Good Stewardship Sets a Solid Foundation Morningstar Firm-Level Data for Target-Date Firms
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gPositive Parents offer long-tenured managers whose interests are aligned with fund shareholders; lower fees are another common attribute
