Target-date fund trends and innovation. For institutional use only. Not for distribution to retail investors.

Transcription

1 Target-date fund trends and innovation

2 Agenda Target-date fund (TDF) landscape and trends What s next in TDF innovation? 2

3 TDF landscape and trends 3

4 Assets under management in $B A brief history of the target-date industry Annual target-date assets under management (AUM) $900B $600B 2013 AUM: $850B Vanguard overtakes Fidelity for market leadership 2006 AUM: $126B Pension Protection Act passed 2003 AUM: $25B Vanguard enters target-date industry $300B 1997 AUM: $2B Fidelity enters the market and owns 50%+ of it until 2006 $0B 1993 AUM: $0 The first TDFs are launched Vanguard Fidelity Investments T. Rowe Price BlackRock JPMorgan Other Sources: Vanguard, Morningstar, company public filings, as of December

5 Dollars in $M Institutional pricing is gaining ground through the use of collective trusts Target-date funds versus collective trusts in retail and institutional assets (in $M) 1,000, ,000 Approximately one-fourth of plan sponsors with more than $100M prefer CITs 800,000 30% 700, , , , , , ,000 0 Mutual funds Collective trusts Note: Excludes custom TDFs. Sources: Greenwich survey of plan sponsors, May 2014; Morningstar, Pension & Investments, Vanguard, company public filings. 5

6 Index-based TDFs are gaining ground 2012 was the first year that passive cash flows outpaced active: $100B $100.0B $90B $90.0B 72% of plan sponsors with more than $100M prefer the use of passive funds in a TDF $80B $80.0B $70B $70.0B $60B $60.0B First year where passive outpaced active $50B $50.0B $40B $40.0B $30B $30.0B $20B $20.0B $10B $10.0B $0B $0.0B Active Other passive Vanguard Sources: Greenwich survey of industry wide plan sponsors, May 2014; Vanguard; and Morningstar, as of December

7 Number of TDF options The number of TDF options has grown significantly since 2006 Number of TDF options available in the marketplace and top 5 share 60 Two-thirds of plan sponsors and consultants believe there will be significant changes to the design of target-date investment solutions that will make them a better investment option 100% 90% 50 80% % 60% 50% 40% 30% 20% 10% Share of top 5 competitors* % Now available Closed Share of top 5 Note: Top 5 competitors: Vanguard, Fidelity, BlackRock, T.Rowe Price, and JP Morgan. Sources: Greenwich survey of industry wide plan sponsors, May 2014; Vanguard; and Morningstar, company public filings, as of March

8 Alternatives are gaining more attention than traction Percentage of DC funds using TDF strategies that include select alternatives (among the top 200 plans) 100% Adoption considerations 80% 60% Tailwinds Potential diversification Single-fund-solution structure protects misuse 40% 20% Headwinds Higher costs Implementation concerns Liquidity 0% Private equity Annuities Hedge funds Real estate equity Commodities REITs TIPS Sources: CNBC, Pension & Investments, McKinsey: The Mainstreaming of Alternative Investments: Fueling the Next Wave of Growth in Asset Management, 2012, Plansponsor.com. 8

9 Cost in basis points Most custom TDFs still have a meaningful performance hurdle Costs by TDF selection: Options for clients with $1B+ in TDF assets bps ~53 bps bps 12 bps ~17 bps 0 Vanguard TRT Plus Industry-wide index off-the-shelf TDF Indexed custom TDF Active custom TDF Industry-wide active off-the-shelf TDF Investments Glide path construction and administration Source: Vanguard. 9

10 What s next in TDF innovation? 10

11 When innovating, where do we spend our time? Focus on the elements that drive investor returns Returns Participant behavior Plan design Investor returns The glide path drives investment returns A 50/50 mix at retirement matches risk tolerance Savings and cost matter most Factors driving long term return variability Distribution of equity allocation at age 65 Probability of a positive balance at age 85 90% Saving rates Cost Glide path 80% 70% 90% 60% 87% 50% 86% 86% 86% 88% Asset allocation the glide path 40% 30% 20% 83% 83% 12% Security selection and market-timing 10% 0% Self-directed investors Managed accounts TDFs 79% 78% -10% Baseline +10% -20% -10% Baseline -10% Baseline +10% Source: Vanguard,

12 What s on the horizon for Vanguard? Constant debate, not constant change Type of change Driving costs down Vanguard launches Target Retirement Trusts Vanguard announces benchmark changes Inception Type of change Broadening global exposure Match participant behavior Simplification Adds exposure to Vanguard Emerging Markets Index Fund Vanguard increases minimum equity allocations in the funds from 20% to 30% Vanguard increases international equity allocation in the funds from 20% to 30% of total equity Replaces the three underlying international equity index funds (Europe, Pacific, and Emerging Markets) with Vanguard Total International Stock Index Fund Vanguard adds a 20% fixed income allocation to Vanguard Total International Bond Index Fund Replaces Inflationprotected Securities Fund with Short-term Inflation-protected Securities Fund Eliminates Prime Money Market Fund and reallocated to the other fixed income components Recent research and today s debates What s the right mix of US/ex-US stocks & bonds? What level of human capital empirically exists for investors in their 60s and 70s? Does market-cap weighted fixed income exposure still make sense? Do liquid alternatives have a place in a TDF? 12

13 Important information For more information about Vanguard funds, visit vanguard.com or call to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date. Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a subsidiary of The Vanguard Group, Inc. All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investments in bonds are subject to interest rate, credit, and inflation risk. Vanguard Total International Bond Index Fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in those currencies. The fund will incur expenses to hedge its currency exposures. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets. Investments in stocks or bonds issued by non-u.s. companies are subject to risks including country/regional risk and currency risk The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. TRFPIBPR

14 Important information For more information about Vanguard funds, visit vanguard.com or call to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing. Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date. Vanguard Target Retirement Trusts are not mutual funds. They are collective trusts available only to tax-qualified plans and their eligible participants. The collective trust mandates are managed by Vanguard Fiduciary Trust Company, a subsidiary of The Vanguard Group, Inc. All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investments in bonds are subject to interest rate, credit, and inflation risk. Vanguard Total International Bond Index Fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund's foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in those currencies. The fund will incur expenses to hedge its currency exposures. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets. Investments in stocks or bonds issued by non-u.s. companies are subject to risks including country/regional risk and currency risk The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. TRFPIBPR