Target-date fund providers are facing challenges in maintaining a competitive edge in the market. With the dominance of five major firms, the industry is experiencing more fund closures than new launches, leading to a slowdown in product innovation.
Key takeaways from the target-date fund market:
- Target-date fund providers face challenges in a competitive market dominated by five major firms.
- Data from Morningstar Direct reveals 14 fund closures and eight new launches in the target-date fund arena.
- Collective investment trusts (CITs) are gaining momentum due to lower costs, increased flexibility, and reduced regulation.
- Mutual fund target-date series have seen limited new launches in recent years.
- Prominent providers have introduced various product variations to solidify their market presence.
- Fund closures have continued despite economic fluctuations, with total assets declining from $3.27 trillion in 2021 to $2.82 trillion.
- Positive economic indicators suggest a more favorable outlook for target-date funds in 2023.
In the target-date fund arena, the landscape is evolving toward saturation, prompting providers to reevaluate their investment offerings. This shift is evident in the data from Morningstar Direct, which reveals that there were 14 fund closures compared to just eight new launches, encompassing both mutual fund and collective investment trust (CIT) variants of target-date series.
Megan Pacholok, a senior analyst for multiasset manager research at Morningstar Inc., emphasizes the growing maturity of the market. She notes that underperforming products are being phased out, as providers typically assess asset growth and market acceptance over a three- to five-year period for new offerings.
The trend of diminishing gaps between launches and closures has been ongoing for several years. In 2019, there were 19 more launches than closures, followed by 11 in 2020 and four in 2021. Morningstar's research covers products from both major providers and smaller entities, often issued by trust companies.
The noteworthy activity in the target-date space is primarily driven by collective investment trusts (CITs), which are gaining momentum compared to their mutual fund counterparts. Factors such as lower costs, increased product design flexibility, and reduced regulation have contributed to the rise of CIT target-date funds. In the previous year, CITs accounted for 47% of the total market share, marking a 10-percentage point increase since 2018, according to Morningstar research.
In contrast, the mutual fund target-date landscape has seen limited new series launches, with no more than five in any given year since 2014. Between 2018 and 2022, there were only two or fewer new launches, while annual closings ranged from one to six. Conversely, collective investment trust launches consistently numbered seven or more every year, except for one year, with peaks of 24 in 2019 and 23 in 2020. However, CITs have also witnessed some closures in recent years, with seven in 2020, seven more in 2021, and 10 in the most recent year.
Nevertheless, the inflow of assets into CIT products has outpaced mutual funds as providers increasingly offer CIT options and even transition their mutual fund target-date offerings into CIT funds, as per Morningstar's data.
This evolution in the target-date fund landscape occurs within the dominance of five key providers: Vanguard Group, Fidelity Investments, T. Rowe Price Group, BlackRock Inc., and American Funds (Capital Group). These giants collectively accounted for 79.9% of mutual fund and CIT target-date assets last year, up from 78.9% in the prior year, according to Morningstar.
The significant market share held by these major players makes differentiation challenging for others in the industry. Megan Pacholok remarks that in situations where all else is equal, sponsors tend to opt for prominent target-date providers based on factors such as cost and track record, potentially leaving smaller providers with fewer clients.
The leading providers have further solidified their market presence by introducing various product variations, such as CITs alongside mutual funds, passively managed funds in addition to actively managed ones, or blends of passive and active management.
This level of diversification among the major providers puts them in a competitive position, leveraging their competitive fees, historical performance, and ongoing research efforts, as noted by Patrick Wisdom, Vice President and Associate Defined Contribution Consultant at Callan LLC. This leaves limited space for competitors, especially when compared to prominent financial institutions that may not have a strong foothold in the target-date fund segment.
Among the recent departures from the target-date fund arena is Goldman Sachs Asset Management, which liquidated its mutual fund target-date series last year following a review of its fund offerings. This marked the second exit for Goldman Sachs from the target-date market, as it previously existed in 2012 and reentered four years later.
Wells Fargo CIT target-date funds also faced closures in 2022, following the sale of Wells Fargo Asset Management to GTCR LLC and Reverence Capital Partners LP in 2021, leading to a rebranding as Allspring Global Investments. These closures were accompanied by the merger of Allspring's Target Date Series with the Allspring Dynamic Target Date series.
Empower Investments closed a mutual fund target-date series in 2022, citing insufficient demand among retirement plan participants for such a structure. However, Empower continues to offer its Lifetime Funds target-date series.
Aon PLC shuttered a CIT target-date fund in 2022 due to limited asset growth and a decision not to expand its marketing efforts beyond existing clients. Nonetheless, Aon still provides a passive CIT target-date series to its clients.
Additional closures include two mutual fund versions from Invesco Ltd. in 2021 and 2023, a CIT from Northern Trust Corp. in 2021, and a CIT from Comerica Bank in 2021. Comerica emphasized its commitment to periodically reviewing its Preferred Savings Plan to meet participants' retirement goals.
The trend of fund closures has persisted despite fluctuations in economic conditions. In particular, last year's challenges disrupted the upward trajectory of target-date assets, as indicated by Morningstar Direct's calculations. Combined CIT and mutual fund assets totaled $2.82 trillion in the previous year, compared to the peak of $3.27 trillion in 2021.
Nevertheless, there are glimpses of a modest rebound, with the first seven months of 2023 witnessing eight target-date fund launches versus four closures. Economic indicators, such as the S&P 500 index's 16.88% gain in the first half of the year compared to a 19.96% decline in the same period in 2022, suggest a positive outlook. The Bloomberg U.S. Aggregate Bond index also showed improvement, rising by 2.09% in the first half of 2023 compared to a 10.35% decline in the first half of the preceding year.
Source: Pensions&Investments
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