Money within target-date funds is moving to passively managed investments, as both an underlying holding within a portfolio and as an overall investment approach. That’s according to the Morningstar Target-Date Series Research Paper: 2013 Industry Survey.

As of Dec. 31, 2012, 68% of target-date fund assets were in actively managed investments. Inflows to passively managed investments (those that invest 80% or more in passively managed investments) overtook flows into actively managed investments for the first time for the 2012 calendar year.

“We found that target-date funds with significantly different asset allocations deliver similar retirement savings outcomes up to age 85,” says Josh Charlson, Morningstar's fund-of-funds strategist. “And as the target-date industry matures, we see an increase in diversification of the underlying investments in terms of both fund strategy and geographical location.”

Overall target-date funds continued to catch the imaginations of retirement investors in 2012, whether viewed on an absolute or relative basis. Target-date mutual funds took in $54.8 billion in net new flows last year, reaching a total of $484.8 billion. The first quarter of 2013 saw an additional $23 billion in new assets, and target-date assets as of March 31, 2013, stood at $508 billion.

Other key findings in the report show that managers of target-date funds have increased allocations to non-U.S. equities. Since 2005, international stocks have risen from 24 percent of the average 2040 fund’s equity allocation to 36 percent, as of Dec. 31, 2012. Emerging-markets bond funds appeared in nine target-date funds in 2008, compared with 18 in 2012.

Assets in target-date series crossed the $500 billion mark in the first quarter of 2013. Also, fees are continuing to fall, as the asset-weighted average expense ratio dropped to 0.91% in 2012 from 0.99% in 2011.

The Morningstar report shows that some of the industry's market leaders include Vanguard, Fidelity, and T. Rowe Price, which still control about three-fourths of the industry's assets, despite impressive growth from some of the industry's smaller players. Meanwhile, four target-date series closed in 2012: American Independence, Columbia, Oppenheimer, and Goldman Sachs.

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community.


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