Wells Fargo sees big TDF outflows from mutual funds

The Wells Fargo Target 2020 Fund (WFOBX) ranks in the bottom 15% among peers when looking at five-year total returns.

Target-date funds are on track for a near-record year, but Wells Fargo & Co. doesn’t seem to be participating in the boom.

TDFs have catapulted to popularity over the past decade as 401(k) plan sponsors’ preferred default investment, and flows have reflected that: Target-date mutual funds have captured more than $50 billion net in 2017, and will likely close out the year near the all-time high of $69 billion, set in 2015.

Despite that, Wells Fargo has seen $4.4 billion flee its target-date mutual funds through October.

“While some are thriving, others are working to hold their ground in the space,” Jeff Holt, multi-asset analyst at Morningstar, said.

Wells Fargo is the 11th-largest manager of target-date mutual funds, according to Morningstar’s 2017 TDF report.

While difficult to pinpoint precisely, lagging performance in its largest funds — the Wells Fargo Target series, formerly the Dow Jones Retirement series — is likely the primary reason for the pullback by investors, Mr. Holt said.

The Wells Fargo Target 2020 Fund (WFOBX) ranks in the bottom 15% among peers when looking at five-year total returns, according to Morningstar data. The picture is worse over a one-year period, ranking in the bottom 10%.

Wells Fargo overhauled its TDF strategy in July to try stemming the asset flight, Mr. Holt said. It fired its subadviser, Global Index Advisors Inc., and brought fund management in-house; increased the funds’ equity exposure; added exposure to previously absent asset classes, such as real-estate investment trusts, high-yield bonds and Treasury inflation-protected securities; changed underlying strategies, such as adding smart-beta exposure; and decreased fees.

“It’s not uncommon, when you see TDFs experience some pressures on the flows, for some revisiting of the approach and the process,” Mr. Holt said.

(More: Fidelity, American Century adopting new TDF fee tactic as cost pressures grow)

Wells Fargo hasn’t been the only asset manager with sizable target-date mutual-fund outflows. T. Rowe Price and Principal Financial Group have also seen billions of dollars flee this year.

However, their situation is a bit different: both have seen net inflows to their funds because of positive flows to their collective investment trust funds, which have grown more popular in 401(k) plans partly because of their often-lower fees.

T. Rowe, for example, had $6.4 billion in net TDF inflows through Q3 when factoring in collective funds, spokesman Bill Weeks said. Principal had more than $3 billion in net inflows through Sep. 30 across its target-date suite, spokeswoman Cait Suttie said.

Further, Wells Fargo has seen a steady drop in target-date mutual fund flows since 2012, but T. Rowe and Principal haven’t had a similar experience.

While Wells Fargo spokeswoman Sarah Kerr said CITs were part of the reason for outflows on the mutual-fund side, she declined to provide net inflow figures and acknowledged that “there are many reasons investors may choose to consider different strategies.”

TDFs represent one of the only sources of growth for some asset managers, particularly those focused on active fund management. These companies have depended on TDFs in recent years to maintain positive flows at the firm level, as investors have poured money into passively managed funds that track a market index.

(More: Some active target-date fund managers shine as passive management continues 401(k) onslaught)

Several TDF providers have also been victim to a broader trend playing out among 401(k) plans in which employers are turning away from the TDF series that’s proprietary to the plans’ record keeper, as plan advisers and sponsors have grown more aware of the fiduciary responsibility to properly vet their providers’ funds.

Wells Fargo has a record-keeping unit, as do John Hancock Investments and Fidelity Investments, two other firms which have had more than $1 billion in target-date mutual-fund outflows this year. Spokespeople for John Hancock and Fidelity didn’t return requests for comment.