Vanguard extends target-date fund dominance

The firm's position as the top TDF provider strengthened against No. 2 Fidelity Investments, which actually had net outflows for this category last year

Apr 12, 2016 @ 4:50 pm

By Greg Iacurci

Vanguard Group extended its lead last year as the largest provider of target-date mutual funds, continuing to put distance between itself and second-place Fidelity Investments, which it dethroned for the top spot in 2014.

Vanguard managed $224.9 billion in target-date mutual fund assets at the end of 2015, representing 29.5% of the overall $763 billion market, according to Morningstar Inc.'s annual Target-Date Fund Landscape report, published Tuesday.

While Vanguard saw a hefty $37 billion of TDF inflows last year, Fidelity had outflows of $4.6 billion, following on $8.9 billion in outflows over 2014, according to Morningstar. Fidelity managed $181.8 billion in total target-date mutual fund assets, for a 23.8% market share.

Vanguard's dominance is even more stark when combining target-date mutual fund assets and those from collective investment trust funds — the firm managed $357 billion in combined target-date assets as of year-end, compared to Fidelity's $195 billion. No other firm appears to manage even $200 billion in total TDF assets, according to Morningstar's report.

Vanguard nabbed the title of largest TDF provider, with respect to mutual fund assets, from Fidelity two years ago. Known widely as a low-cost mutual fund provider, Vanguard's TDF flows were positively affected by the trend toward more passively managed funds and the 401(k) industry's increasing focus on fees, according to Jeff Holt, multi-asset analyst at Morningstar and a co-author of the TDF report.

TDF flows overall in 2015 were the highest they've ever been, at $69 billion in positive net flows. That occurred even as average target-date mutual fund returns were slightly negative for the year, meaning investor contributions drove asset growth.

“We see the trajectory for TDF growth. There's nothing impeding it,” Mr. Holt said.

TDF assets have ballooned in the decade since passage of the Pension Protection Act of 2006, which gave legal protections to plan sponsors using the funds as a default investment.

TDF flows last year highlight the extent to which some asset managers rely on TDFs to garner inflows for the firm. Among all the firms offering target-date mutual funds, TDF flows represented roughly half of asset managers' overall net new flows in 2015, according to Morningstar.

“In many cases, the firm would have had negative flows had it not been for assets flowing through their TDFs,” Mr. Holt said.

That's especially true for some asset managers who traditionally lean on more active-management strategies. For example, T. Rowe Price and American Funds, both of which are top 5 providers, would have had net outflows at the firm level were it not for their TDFs, which had $10.7 billion and $7.5 billion of inflows, respectively, on the year.

American Century Investments, a top 10 provider, had positive TDF flows of $2.4 billion, but still had mutual fund outflows at the firm level.

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