If combatants in the debate over target-date fund investment approaches thought Morningstar Inc. could provide a tiebreaker, they were out of luck.
A recent Morningstar report found no correlation in performance among selected fund families that used in-house investment managers, outside subadvisers or a combination of the two.
“We tried to look for patterns, but nothing popped out,” said Josh Charlson, senior fund analyst for Chicago-based Morningstar. “This study is setting a baseline to determine changes over time.”
Morningstar looked at several measurements — including risk-adjusted returns and investment manager skill — but it couldn't offer a verdict on open architecture vs. closed architecture.
Because many of the target-date fund families are young, Mr. Charlson said Morningstar will have to wait a few years to determine whether there's a link to performance by target-date approach. “Five-year records will be more telling than three-year records,” he said. “Five-year records will even out the volatility (of 2008 and 2009).”
Morningstar began offering quarterly analyses of target-date funds in September. The latest report, issued in March, was the first effort to digest architecture.
Of course, an inconclusive conclusion about target-date architecture and performance enabled various practitioners to defend their approaches and rebut their critics.
For example, T. Rowe Price Group, Baltimore, which employs closed architecture, had $43.7 billion in target-date fund assets by the end of 2009, said Jerome Clark, portfolio manager of retirement-date funds.
“So that means we are talking to plan sponsors who are very sophisticated and who, nine times out of 10, have a consultant,” he said. Such scrutiny by clients and consultants punctures the critics' argument that closed-architecture companies can use target-date funds to hide weak managers, said Mr. Clark, adding, “We have no incentive to put a poor performer into our lineup.”
Open-architecture companies offer an equally strong defense for their approach. “We never thought about doing it any other way,” said Wayne Wicker, senior chief investment officer of ICMA-RC, Washington, sponsor of the Vantagepoint Milestone target-date fund family, which uses only outside investment managers.
The Morningstar report called Vantagepoint Milestone a “standout” among open-architecture funds. The fund family benefited from “strong manager selection, a relatively conservative glide path, reasonable — though recently increased fees —and a stellar and experienced investment culture,” Morningstar said.
ICMA-RC manages and administers retirement plans for public-sector employers and employees. Of its approximately $34 billion in retirement assets, $1.2 billion are held in target-date funds.
Mr. Wicker said economies of scale help his target-date fund family address an issue raised by critics that open architecture can elevate costs because of using many outside managers. “This provides us with the ability to negotiate a lower cost basis,” Mr. Wicker said. Smaller open-architecture fund families don't have this advantage, he said.