CITs Still Poised to Surpass Mutual Funds in Battle for Target Date Assets

While collective investment trusts (CITs) almost caught mutual funds in 2023 as the most popular target-date vehicle, it appears likely they will overtake mutual funds by the end of 2024.  

Image: Shutterstock.comAccording to Morningstar’s annual Target-Date Strategy Landscape Report released March 26, CITs—which since at least 2020 have attracted the most new money—continued to dominate in 2023, even as their flows decreased slightly and target-date mutual funds increased slightly.   

By the end of 2023, CITs had reached 49% of the market share. That was up from 47% in 2022 and 9 percentage points from five years earlier.  

CITs collected roughly $104.5 billion in 2023—or 67% of the $156 billion of net inflows into target date strategies—down from 79% in 2022. Target-date mutual funds, meanwhile, took in roughly $51.8 billion, up from $32 billion in 2022.

What’s more, mutual fund to CIT conversions continued, signaling the growing popularity of CITs, the report further emphasizes. Based on reported flow data, more than $22.6 billion in target-date mutual funds converted to CITs in 2023—although this was a significant drop from the more than $50 billion that was converted in 2022.

“This year, we saw target-date CITs continue their momentum, and we expect them to surpass mutual funds as the most popular target-date vehicle by the end of 2024,” noted Megan Pacholok, senior manager research analyst at Morningstar.

Overall, net flows increased slightly year-over-year, helping to propel assets to a record high of $3.5 trillion, the report shows.

Assets Rebound While Fees Decrease

Morningstar’s annual report also shows a rebound in assets and a continued decrease in fees.

To that end, while investors have chosen lower-cost options, firms have also cut fees. The report shows that the asset-weighted fee dropped 4.6% to 30 from 32 basis points in 2023. Overall, expenses have nearly halved over the last decade, dropping by an average of 6.2% annually.

That years-long trend gathered momentum in 2023 when every target-date mutual fund fee quintile saw outflows except the cheapest, which had more than $80 billion in inflows, the report notes.

Accordingly, the cheapest quintile’s net flows increased from $54.4 billion in 2022 and $59.2 billion in 2021. In contrast, target-date mutual funds in the four more expensive quintiles saw $28.2 billion in outflows.

That said, last year’s percentage decline was the lowest since 2014. Morningstar notes that because CIT fee data is not as transparent, it is not included, but adds that anecdotal evidence indicates CITs would lower the average asset-weighted fee.

Meanwhile, target-date strategies rode the broader market tailwinds in 2023 after a tumultuous 2022, where even conservative target-date Morningstar categories dropped by double digits. U.S. target-date category returns in 2023 ranged from 10.3% for the most conservative peer group to 20.2% for the most equity-heavy.

The rebound apparently favored funds concentrating in the technology, communications, and consumer cyclical sectors, while energy—2022’s only bright spot—flatlined in 2023, Morningstar notes.

Younger investors, in particular, also experienced a bounce back. To that end, markets favored later TDFs with heavier equity allocations and more exposure to outperforming sectors like technology. That benefited younger investors, who typically own such funds, Morningstar notes.  

“The largest 10 target-date 2055 series, as measured by mutual fund and CIT assets, mostly stuck with their allocations despite a tricky 2022, which caused their category rankings to be in flux from one year to the next,” the report further observes.

Morningstar’s report further shows that the five managers with the largest share of target-date assets collectively hold around 80% of the total market and have mixed splits between mutual fund and CIT assets. Vanguard, T. Rowe Price, and BlackRock have the majority of their assets in CITs, while Fidelity and American Funds have a larger asset base in mutual funds.

In addition, target-date providers have rounded out their product shelves by launching multiple series that have the same equity glide path but use all active funds, all passive funds, or a mix of both. After reviewing long-term performance trends, returns after fees are largely similar to one another despite the differences in underlying funds.

The Target-Date Strategy Landscape Report is available to download here.


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