Morningstar Report Reveals Collective-Investment Trusts Poised to Overtake Mutual Funds in Target-Date Strategies in 2024

Rhea-AI Summary

Morningstar's annual Target-Date Strategy Landscape Report reveals a $156 billion net inflow into target-date strategies in 2023, with a record high of $3.5 trillion in assets. Low fees and research-driven glide paths make target-dates attractive for retirement savings, with CITs gaining popularity over mutual funds.

Insights

Market Research Analyst

The data highlighted by Morningstar, Inc. regarding the influx of capital into target-date strategies is indicative of a broader trend in the investment community. The substantial allocation of $156 billion in net inflows, with a significant portion directed towards collective investment trusts, reflects a shift in investor preference. This pivot towards CITs, driven by their lower fee structures and potential tax advantages compared to mutual funds, can influence fund managers to reassess their offerings to retain or grow market share.

Moreover, the record asset value of $3.5 trillion underscores the resilience of target-date strategies amidst market fluctuations. This resilience and the positive returns in 2023, following the previous year's volatility, suggest that target-date funds may serve as a barometer for investor confidence in long-term, retirement-focused portfolios. As such, financial advisors and retirement plan sponsors might find this an opportune time to re-evaluate their strategy recommendations, potentially impacting the broader retirement planning industry.

Financial Analyst

Analyzing the report's implications on the stock market, the surge in assets under management (AUM) for target-date strategies could signal investor optimism and a potential for increased stability in the equity markets. This optimism, if sustained, may lead to a positive feedback loop, encouraging further investment. However, the preference for low-fee options, such as CITs, might pressure asset managers to compress fees, potentially affecting their profit margins.

From an investment standpoint, companies that provide target-date strategies could see their stock valuations positively influenced by the growth in AUM and the accompanying management fees. Conversely, companies that fail to adapt to the fee compression trend or the shift towards CITs might face competitive disadvantages. Stakeholders in asset management firms should closely monitor these trends, as they may have material impacts on revenue streams and market positioning.

Economist

From an economic perspective, the report by Morningstar, Inc. reflects a broader economic trend of increased savings for retirement, which could have several macroeconomic implications. The accumulation of assets in target-date funds suggests a growing pool of capital that could be invested across various sectors, potentially driving economic growth. Additionally, the emphasis on lower fees could enhance consumer surplus, as investors retain a greater share of their returns.

However, it is essential to consider the potential long-term effects of such a concentration of assets in target-date strategies. The increase in AUM may lead to significant capital being locked into specific investment trajectories, which could dampen market liquidity and flexibility. This could be particularly relevant during periods of market stress, where the ability to reallocate capital swiftly is crucial.

Annual Target-Date Strategy Landscape Report shows a rebound in assets and continued decrease in fees

CHICAGO--(BUSINESS WIRE)-- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment insights, today published its annual Target-Date Strategy Landscape Report, which found that in 2023 investors poured $156 billion of net inflows into target-date strategies, of which $104.5 billion—or 67%—went into collective investment trusts (CITs). Net flows slightly increased year-over-year, helping propel assets to a record high $3.5 trillion.

“Investors in target-date strategies largely experienced positive returns in 2023, after the market turmoil of 2022. Low fees and research-driven glide paths continue to make target-dates a great tool for hands-off investors to save for retirement,” said Megan Pacholok, senior manager research analyst at Morningstar. “This year, we saw target-date CITs continue their momentum, and we expect them to surpass mutual funds as the most popular target-date vehicle by the end of 2024.”

The 2024 report provides an in-depth analysis of the target-date industry, including 2023 asset flow data, the pivotal role of fees in series selection, a performance breakdown for active- versus index-based series, and trends influenced by large plan sponsors on investors.

The Target-Date Strategy Landscape Report is available here. Key findings from the report include:

• Target-date assets reached a new high of about $3.5 trillion after gathering roughly $156 billion in net flows in 2023 and experiencing market appreciation.
• CITs now represent 49% of the market and are on pace to overtake mutual funds as the most popular target-date vehicle this year. These offerings absorbed 67% of total flows in 2023.
• The five managers with the largest share of target-date assets collectively hold around 80% of the total market and have mixed splits between mutual fund and CIT assets. Vanguard, T. Rowe Price, and BlackRock have the majority of their assets in CITs, while Fidelity and American Funds have a larger asset base in mutual funds.
• Investors are favoring cheaper target-date options, which paired with firms cutting fees, helped push the asset-weighted expense ratio for target-date funds to 0.30% in 2023 from 0.32% the year prior. Funds in the lowest expense quintile saw substantial inflows while the four other quintiles experienced net outflows.
• Target-date providers have rounded out their product shelves by launching multiple series that have the same equity glide path but use all active funds, all passive funds, or a mix of both. After reviewing long-term performance trends, returns after fees are largely similar to one another despite the differences in underlying funds.

Morningstar today published a Fund Spy article on Morningstar.com that reviews the latest ratings for target-date fund series covered by Morningstar analysts, available here.

Morningstar Target-Date Fund Series Reports

Morningstar Target-Date Fund Series Reports (the Reports) are designed to help individual investors, financial advisors, consultants, plan sponsors, and other interested fiduciaries make informed decisions when selecting a target-date series.

Morningstar Target-Date Fund Series Reports and Morningstar's Medalist Ratings for target-date series are available in Morningstar Direct^SM, the company's global investment analysis and reporting platform for financial professionals, and in Morningstar Office^SM, Morningstar® Advisor Workstation^SM, and Morningstar® Analyst Research Center^SM, the company's investment planning and research platforms for financial advisors.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment insights in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services for individual investors, financial advisors, asset managers and owners, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $286 billion in assets under advisement and management as of Dec. 31, 2023. The Company operates through wholly- or majority-owned subsidiaries in 32 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on X @MorningstarInc.

Morningstar’s Manager Research Group

Morningstar’s Manager Research Group consists of various wholly owned subsidiaries of Morningstar, Inc. including, but not limited to, Morningstar Research Services LLC. Morningstar Manager Research provides independent, fundamental analysis on managed investment strategies. Morningstar views are expressed in the form of Morningstar Medalist Ratings, which are derived through research of three key pillars—People, Process, and Parent. The Morningstar Medalist Rating is the summary expression of Morningstar’s forward-looking analysis of investment strategies as offered via specific vehicles using a rating scale of Gold, Silver, Bronze, Neutral, and Negative. A global research team issues detailed research reports on strategies that span vehicle, asset class, and geography. Medalist Ratings are not statements of fact, nor are they credit or risk ratings, and should not be used as the sole basis for investment decisions. A Medalist Rating is not intended to be nor is a guarantee of future performance. This press release is for informational purposes only; references to securities should not be considered an offer or solicitation to buy or sell the securities.

©2024 Morningstar, Inc. All Rights Reserved.

MORN-R

View source version on businesswire.com: https://www.businesswire.com/news/home/20240325374641/en/

Michael Claussen, +1 312-244-8981 or newsroom@morningstar.com

Source: Morningstar, Inc.

FAQ

How much net inflow did target-date strategies receive in 2023 according to Morningstar's report?

Morningstar's report states that target-date strategies received $156 billion of net inflows in 2023.

What percentage of the net inflows into target-date strategies went into collective investment trusts (CITs) in 2023?

67% of the net inflows into target-date strategies went into collective investment trusts (CITs) in 2023 according to Morningstar's report.

What was the total assets in target-date strategies in 2023 as per Morningstar's report?

Morningstar's report shows that target-date strategies reached a record high of $3.5 trillion in assets in 2023.

What are the key benefits of target-date strategies highlighted in Morningstar's report?

Morningstar's report emphasizes that target-date strategies offer positive returns, low fees, and research-driven glide paths, making them a great tool for hands-off investors to save for retirement.

What is expected to be the most popular target-date vehicle by the end of 2024 according to Morningstar's report?

Morningstar's report anticipates that target-date CITs will surpass mutual funds as the most popular target-date vehicle by the end of 2024.