Morningstar Inc. last week launched ratings and research reports for 20 of the largest target date mutual funds — and identified
The Vanguard Group Inc. as the best target date provider for investors, based on such criteria as management, fees and performance.
OppenheimerFunds Inc. was rated the lowest — a position a spokeswoman for the firm said was undeserved.
“Target date funds serve as the core holding for millions of investors as they plan for retirement — often as the only holding — and are increasingly an automatic default option within defined contribution plans,” Laura Pavlenko Lutton, editorial director in Morningstar's mutual fund research group, said in a statement. “Our new ratings and research reports are designed to help individual investors, financial advisers and plan sponsors make the best possible decisions when evaluating a series of target date funds.”
Morningstar evaluates such funds on five components: people, parent, performance, portfolio and price.
People and parent ratings are determined by both qualitative and quantitative measures of the funds' management processes.
Performance, portfolio and price ratings use quantitative measures to evaluate the quality of the target date funds and the underlying holdings in which they invest, as well as the cost that investors must pay.
Morningstar assigns one of five ratings for each component: top, above average, average, below average or bottom.
Based on the five component ratings, each target date fund group earns an overall rating using the same grade scale.
The Vanguard Target Retirement funds employ best practices with low fees, a high level of transparency and prudent, investor-oriented management, according to Morningstar's research.
Vanguard's high-quality orientation was an important factor last year, when its target date funds performed relatively well despite holding a stock allocation similar to many of its peers, Morningstar said. The company's long-tenured managers also bolster the funds' appeal.
Meanwhile, a relatively aggressive asset allocation and severe problems in some of OppenheimerFunds' target date funds' underlying bond holdings led to very poor performance last year, according to Morningstar.
Investor losses were further compounded by the steep fees associated with the funds, Morningstar added. OppenheimerFunds has the highest fees among all target date fund groups that Morningstar tracks.
OppenheimerFunds, however, defended its target date funds.
“Our target date funds are designed to offer capital appreciation and income over time,” said Jeaneen Pisarra, a spokeswoman for OppenheimerFunds. “Regarding our funds' 2008 performance, unprecedented market volatility contributed to the underperformance. We're disappointed in that and have taken steps to address it.”
E-mail David Hoffman at [email protected].
