February 29, 2024

CIT Target Dates Predicted to Overtake Mutual Funds in 2024

Although collective investment trust (CIT)-based target-date (TD) products were expected to overtake mutual funds in 2023 and didn’t—that may finally change, according to Sway Research’s 2024 State of the Target-Date Market report.

Image: Shutterstock.comThough mutual fund series still possess slightly more assets, CITs—which generally charge lower fees—are proliferating. At the end of 2018, there were 62 mutual fund series controlling 62% of TD assets. Five years later, there are only 49 mutual fund series left on the market, and their asset share has fallen to 51%, the report notes.  

Meanwhile, asset share of CITs has not only increased from 38% to 49% since the start of 2019, but there are now 85 CIT-based TD options available to investors, up from 61 in 2018.

Overall, mutual fund target-dates began 2024 with $1.76 trillion in assets, compared to $1.71 trillion for CIT target date options. However, assets in CIT-based target-dates expanded by a greater margin in 2023 (26%) compared to mutual fund products, which gained 19%.

To that point, the report notes that in 2023, a single mutual fund series (PIMCO RealPath Blend) was among the 10 fastest-growing large-sized (i.e., >$1 billion of AUM) TD solutions, while the other nine were all CITs.

Active vs. Passive

The other side of the low-expense coin lies in products that invest in passive underlying portfolios. Sway notes that with each target-date report, it analyzes TD mutual fund expenses, as high-quality data is available via public filings, unlike in the CIT space, where fees fluctuate across plans and platforms.

According to the report, the average investor in a passive target-date (i.e., a series that invests in passively managed underlying portfolios) paid nine basis points of expenses in 2023 vs. 55 basis points for the average investor in a TD series that invests in actively managed portfolios and 40 basis points for a hybrid TD series.

Passive target-date series finished 2023 with 61% asset share, up from 55% at the outset of 2020. In comparison, active TD series concluded 2023 with 30% asset share, down from 36% at the start of this decade. The asset share of hybrid target-dates has remained at 9% over the same period.

Sway’s report further observes that lower expenses don’t necessarily produce higher returns, but in 2023, the asset-weighted return of passive mutual fund target-date series was 17.3% vs. 16.9% for active series and 16.6% for hybrid solutions.

Hybrid target-dates fared best over three years, though by only a single basis point compared to active series—3.52% for hybrids annually to 3.51% for actives—while passive solutions returned 3.43%. That said, the research also revealed that heading into 2024, active mutual fund target-dates possessed higher asset-weighted annual returns over 5 and 10 years.

Mutual Fund TD Expenses Plunge

Sway’s research further revealed that the average investor in a mutual fund-based target-date series paid 30.6 basis points in expenses in 2023 and earned a 17.1% return for the year. This is based on an asset-weighted analysis across all three management styles (i.e., active, hybrid and passive).

In comparing expenses across years, 2023 was a notable improvement over 2018, when the average investor in a target-date mutual fund paid 43.1 basis points of expenses. This 41% decline was driven by the shift of assets into lower-cost passive and hybrid offerings, as well as a general downward trend in expenses across target dates of all types, the report notes.  

The Big Get Bigger

As most industry observers are likely aware, higher asset levels provide asset managers with greater flexibility to reduce fees, thus making larger TD series more competitive in the marketplace. According to the report, this is leading to an increasingly high concentration of assets in a small group of TD providers.

At the close of 2023, the 10 largest TD providers controlled 94.3% of the AUM, up from 92.4% in 2018. In the passive space, where fees are especially important to achieving success, just five providers controlled 96.4% of passive TD assets, with Vanguard alone possessing 61% asset share at the close of 2023.

As to that concentration, the report shows that during 2023, American Funds Target Date Retirement mutual funds surpassed BlackRock LifePath Index CIT to become the third largest TD series, by vehicle, behind the CIT and mutual fund versions of Vanguard Target Retirement, which held $668 billion and $620 billion, respectively, at year end. American Funds Target Date Retirement mutual funds finished 2023 with $272 billion.

However, BlackRock LifePath Target-Dates still managed $427 billion of total AUM across all strategies and vehicles, while T. Rowe Retirement Target-Dates managed $350 billion across its mutual fund and CIT versions.

Meanwhile, since the beginning of 2019, Capital Group’s TD assets expanded from 5.9% to 8.2% of the TD market, excluding assets in custom TD strategies. Over the same span, market leader Vanguard grew its asset share by one-half of a percentage point. Vanguard’s TD assets totaled $1.29 trillion as of the end of 2023, which equaled 37.1% of the market. Between Vanguard and Capital Group—which rank #1 and #5 among the largest TD providers—are Fidelity with $498 billion of target-date AUM, BlackRock with $427 billion (including custom strategies), and T. Rowe Price with $388 billion.  

Sway’s annual in-depth study of the TD market is based on a proprietary database of mutual fund and CIT target-date portfolio and asset data, which included 135 TD solutions with AUM as of year-end 2023, spread across more than 6,200 mutual fund share classes and CITs.

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