The target-date fund market is becoming saturated, causing providers to liquidate or merge investment options and slow the pace of product launches in an industry dominated by five companies with nearly 80% of the market share.
Last year, for example, Morningstar Direct found that target-date closings outnumbered launches. Covering both mutual fund and collective investment trust versions of target-date series, it reported 14 closings vs. eight launches.
"The market is becoming more mature," said Megan Pacholok, Morningstar Inc.'s Chicago-based senior analyst for multiasset manager research.
"Whatever isn't working will be closed," said Ms. Pacholok, adding that providers usually give new products three to five years to assess asset growth and market acceptance.
According to Morningstar Direct, the spread between total launches and total closings had been shrinking for several years: the former outnumbered the latter by 19 in 2019, then by 11 in 2020 and by four in 2021. Morningstar's universe includes products from the largest providers but also smaller products often issued by trust companies.
Most of the positive target-date action has come from collective investment trusts, which are rapidly gaining ground on their mutual fund cousins, a function of lower cost, greater flexibility in product design and less regulation. CIT target-date funds accounted for 47% of the total market last year, up 10 percentage points from 2018, according to Morningstar research.
Since 2014, no more than five mutual fund target-date series were launched in any year, including two or fewer between 2018 and 2022. The number of annual closings from 2018 to 2022 ranged from one to six. By contrast, there have been seven or more collective investment trust launches every year except one between 2014 and 2022. The peaks were 2019 with 24 and 2020 with 23.
However, even CITs have eased off in aggregate: seven closed in 2020, seven more in 2021 and 10 last year.
Still, target-date inflows to CIT products have exceeded mutual funds in recent years as providers add CIT options and even convert their mutual fund target-date funds to CIT funds, according to Morningstar.
Target-date fund churning is taking place while five providers — Vanguard Group, Fidelity Investments, T. Rowe Price Group, BlackRock Inc. and American Funds (Capital Group) — dominate the market. Last year, they accounted for 79.9% of mutual fund and CIT target-date assets, up from 78.9% in 2021, according to Morningstar.
The major players "make up so much of the market that it's hard (for others) to differentiate," Ms. Pacholok said. "All things being equal," a sponsor may choose a prominent target-date provider for cost and track record over a smaller provider, she said. Sponsors who choose a smaller provider "might be the only client."
Meanwhile, the big providers have been tightening their grip on the market by adding new versions — a CIT in addition to a mutual fund; a passively managed fund in addition to an actively managed one; or a blend of passive and active management.