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Special Report

Vanguard again leads pack among managers of DC mutual funds

Auto-enrollment, default options spur big growth in target-date funds

Morningstar Inc.’s Jeff Holt

For the third year in a row, Vanguard Group Inc. is the largest manager of mutual funds for U.S. defined contribution plans, according to Pensions & Investments' latest survey.

The Malvern, Pa.-based manager reported $716.6 billion in proprietary mutual fund assets as of June 30, a 17.8% increase from the previous year, and a 26.1% increase from 2015 when it knocked Fidelity Investments to second place for the first time in the survey's more than 20-year history. Boston-based Fidelity Investments reported $524.4 billion in proprietary DC mutual fund assets as of June 30, a 6% increase from 2016, but a 0.8% decrease from 2015. Fidelity has ranked second since 2015.

The rest of the top five ranking has also remained unchanged since 2015: Capital Group Cos. Inc. was ranked third with $335.9 billion in assets as of June 30, up 21.3% from 2016, followed by T. Rowe Price Group Inc. at $234.4 billion, up 9.7%; and J.P. Morgan Asset Management (JPM) at $99.2 billion, up 5.4%.

In aggregate, the 25 largest managers of mutual funds managed $2.706 trillion as of June 30, up 12% from 2016. The total for the top 25 is affected by Franklin Templeton (BEN) Investments (BEN), which did not participate in the 2017 survey. Franklin, which reported $25.9 billion in 2016, was removed from the top 25 for year-over-year comparison.

Managers and industry experts overwhelmingly pointed to rising inflows to target-date strategies as part of the top 25's growth story. Assets in target-date mutual funds were included in the managers' mutual fund total.

In line with those observations, the five largest mutual fund managers in 2017 also ranked among the 10 largest target-date managers.

Occupying the same spots since 2015, the five largest target-date managers in 2017 were Vanguard with $379.1 billion in proprietary assets, up 36.2% from 2016; Fidelity with $188.6 billion, up 17%; T. Rowe Price Group Inc., $173.5 billion, up 12.9%; BlackRock (BLK) Inc. (BLK), $167.3 billion, up 32.1%; and J.P. Morgan Asset Management, $101 billion, up 22.9%. (Mutual funds, commingled trusts and separate accounts are included under the target-date total).

Combined, the 20 largest target-date managers ran $1.290 trillion as of June 30, up 28.6% from 2016. The top five accounted for a little more than $1 trillion of that.

In general, target-date strategies are experiencing "tremendous growth" from auto features and their use as a qualified default investment option, said Jason Shapiro, senior investment consultant at Willis Towers Watson in New York.

Jeff Holt, associate director, manager research, at Morningstar Inc. in Chicago, was not surprised to see the same names at the top year-over-year.

Regarding Vanguard, Fidelity and T. Rowe Price, Mr. Holt said their early entrance to the space and significant record-keeper presence helped them gain a significant share of the target-date market early on.

Regarding BlackRock, Mr. Holt said the firm's LifePath Index target-date series, which is comprised of low-cost passive funds and exchange-traded funds, is attractive to investors looking for a low-cost target-date option. BlackRock was also an early arriver to the target-date space, Mr. Holt said.

With the majority of assets concentrated among the top five, it can be hard for other managers to gain ground. Some firms have tried to differentiate themselves by offering actively managed non-proprietary target-date series and series that blend active and passive funds, Mr. Shapiro said.

Although not in the top five, Capital Group, which offers the American Funds family, saw its target-date assets increase 70.6% over the year to $58.7 billion. It now ranks sixth on the target-date list, up one spot from last year.

Strong underlying funds and a glidepath that looks beyond equity and fixed income to understand what kinds of equity and fixed income are appropriate for investors at particular points in time have contributed to the success of the firm's active target-date series, said Sue Walton, Chicago-based senior defined contribution strategist at American Funds. As participants near and enter into retirement, for instance, they benefit from having more income-oriented equity than growth-oriented equity, Ms. Walton said. The series' glidepath is managed 30 years beyond retirement.

A strong performance record and lower fees than some other active target-date managers also make Capital Group's target-date series attractive, Mr. Holt said.

Wells Fargo Asset Management was the only target-date manager in the top 20 this year to report a decline in assets (down 36.5% to $10.9 billion as of June 30),

Following a period of net outflows, the San Francisco-based firm revamped its Wells Fargo Dow Jones Target-Date Funds in July, Mr. Holt said.

Wells Fargo spokesman Peter Greenley did not elaborate on the firm's decline in total target-date assets but acknowledged target-date changes in an email. According to Mr. Greenley, major changes included "significant fee reductions," an "evolution in the glidepath with a higher equity allocation, in particular near retirement," and an improvement in "how we manage and control key risk factors within both equities and fixed income."

The funds are also now managed in house, Kristi Mitchem, president and CEO of Wells Fargo Asset Management, told Pensions & Investments in an earlier story. Previously, the firm used two subadvisers — State Street Global Advisors and Global Index Advisors.

Outside of the growth of target-date funds, Scott Conking, principal and head of institutional investor services at Vanguard, said other DC trends Vanguard has benefited from is the inclusion of index fund tiers in plan lineups and plan sponsors' search for "strong brands with low costs."

Mr. Shapiro also pointed to capital appreciation as a likely big contributor to the overall mutual fund and target-date growth in this year's survey. For the 12 months ended June 30, the Russell 1000 returned 18.03%; the Russell 2000, 24.6%; and the MSCI Europe Australasia Far East index, 20.27%.

While Fidelity's mutual fund assets rose 6% over the 12 months ended June 30 to $524.4 billion, they were still below their 2015 level of $528.8 billion. Responding to a request for comment on the decline over the two-year period, Katie Taylor, vice president of thought leadership at Fidelity, said that some of the firm's larger plan sponsors have been able to migrate from mutual funds to Fidelity collective investment trusts for more flexibility and lower pricing.

P&I's survey also looked at the average allocation of DC mutual funds, finding that domestic equity continues to have the greatest allocation at 41.2% (vs. 42% in 2016), followed by target-date mutual funds at 23.8% (22.9%); international/global equity, 12.3% (11.7%); domestic fixed income, 9.5% (10.7%); balanced/asset allocation, 8.4% (7.5%); money market, 3.4% (3.7%); and other, 1.4% (1.5%).

Remarking on domestic equity's dominance, Mr. Shapiro said plan sponsors tend to offer more standalone U.S. equity options than any other asset category. Within target-date funds, however, Mr. Shapiro said he believes that managers are starting to "mitigate their U.S. bias a bit," A few years ago, a 70% U.S. equity/30% non-U.S. equity allocation was common, Mr. Shapiro said.

Today, that equity allocation in target-date funds is closer to 60% U.S. equity and 40% non-U.S. equity, he said.