Target-date funds are trending more toward passive investing as the industry adapts to increased demand from investors for lower-fee products, according to a new report.
Assets in passive target-date mutual funds grew by 5.4% in 2019, while those in active target-date mutual funds contracted by 7.0%—reflective of a broad trend toward passive investments in the asset management industry, according to a report released today by financial research firm Cerulli Associates in Boston.
From 2017 to 2018, the market share lead of active target-date assets fell from 18.1% to 12%, reflecting an industrywide move toward low-cost, flexible solutions, the report said.
Moreover, passive target-date funds saw net inflows of $54.8 billion during the same period, while active funds experienced net outflows of $1.3 billion, the report said.
The report also noted that fee compression has also caused further consolidation in a target-date fund industry where Vanguard, Fidelity and T. Rowe Price collectively control $1.1 trillion, or 63%, of the industry's total assets.
"Fee compression in target-date funds persists unabated as assets in target-date funds continue to grow at a rapid clip and remain concentrated in a handful of asset managers," the report said. "The scale of assets required to launch a new target-date fund priced low enough to compete with the largest managers is an increasingly powerful barrier to new entrants."
Target-date funds are attempting to offer new options to deal with fee competition, including transitioning to managed accounts, blending active and passive strategies and creating white-labeled, open-architecture products, the report said.
A Cerulli survey of target-date fund managers this year found that 70% expect net flows to passive target-date funds to increase during the next 12 months, while only 35% said the same for active target-date funds
Overall, the target-date industry experienced growth in 2018 despite equity markets experiencing their worst year since the 2008 financial crisis, the report said. Off-the-shelf target-date assets grew 0.7%, compared with 30.3% in 2017 and 21% in 2016.
More than 80% of target-date funds continue to be held in 401(k) plans, the report said. "This underscores the organic growth of target-date funds; their assets increased even as total 401(k) assets declined by 5.0% in 2018," the report said.