Assets invested in passive target-date funds are growing at a much faster rate than those in active target-date funds, although active funds still have a substantial majority of assets.
As a result, passive target-date funds are taking a bigger piece of the total target-date pie — 30.5% as of July 2012 vs. 14.6% for year-end 2006, according to Morningstar Inc., Chicago.
Passively managed funds held $134.5 billion in assets as of July, an eight-fold increase since year-end 2006, according to Morningstar.
Actively managed target-date funds reported assets of $306.5 billion in July, more than triple the amount in 2006, the year the Pension Protection Act took effect. (All statistics exclude custom funds, for which no comprehensive data is available.)
Although lower costs motivate sponsors to seek passively managed funds, other reasons for their growth include “a desire for less active manager risk, less tracking error, less volatility and more predictability,” said Josh Charlson, senior mutual fund analyst for Morningstar.
But Mr. Charlson isn't sure passive funds will ever overtake active ones because of “barriers to entry” for firms wanting to join the fray. Among them: “Can you compete on price with other providers” already in the market? “Do you have existing index funds in-house that provide enough diversification to create a target-date fund? Do you have enough expertise in index funds?”
(Morningstar defines a passive target-date fund as containing 90% or more passively managed investments.)
Thirteen of the 40-plus target-date providers offer passive funds, with Vanguard Group Inc. accounting for 83% of the market, at $89.9 billion in passive target-date fund assets as of Dec. 31, according to Morningstar. Last year alone, its assets grew 16%.
The Wells Fargo Advantage Dow Jones Target series, with $10.8 billion in year-end 2011 assets, placed a distant second with 10% of the market. Assets grew 18%, reflecting both market gains and contributions during 2011.
One provider of passive target-date funds is bowing out. American Independence Financial Services LLC, New York, announced it July that it would liquidate its index-based NestEgg series, which has approximately $135 million in assets.
NestEgg had been available through American Independence and a predecessor firm since 2000. American Independence said it would have had to build or buy a record-keeping system to compete in the target-date market, and it decided the cost was too great.
In recent years, several prominent providers have begun offering passive target-date funds in addition to active ones.