Index-Tracking Model Booms As Target-Date Funds Top $1 Trillion Mark - Data

Tom Burroughes

7 May 2018

Target-date mutual funds rose above the $1 trillion mark last year, surging from $158 million a decade ago, with index funds accounting for the lion’s share of this growth, figures from Morningstar.

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 had another big year in 2017 with an all-time high of $70 billion in estimated net flows. Even more remarkable than the funds' strong growth, though, was seeing the heightened demand for low-cost, passive target-date series," Jeff Holt, Morningstar's director of multi-asset and alternative strategies team, said. "Approximately 95 per cent of target-date funds' net flows went to series that invest predominantly in index funds; a sizable jump from roughly two thirds the previous year,” he said.

There was a record $70 billion in estimated net flows to target-date funds last year. These funds have drawn in more than $40 billion in net flows each year since 2008.

In 2017, passive target-date series - ones that invest predominantly in index funds – draw in nearly all of the net inflow, highlighting how cost pressures favor such funds as opposed to actively managed ones.
This trend has caused analysts to predict more consolidation in the North American and other regions’ asset management sectors.

Fees for target-date funds continued their multiyear downward trend in 2017. The average asset-weighted expense ratio fell to 0.66 per cent at the end of 2017, falling from 0.91 per cent from five years ago.
Morningstar sounded a note of caution about the trend, however.

"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. 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," Holt said.