Morningstar is offering advisers in-depth research reports for 20 of the largest target-date mutual fund series, based on five components making up the “five P’s”: People, Parent, Performance, Portfolio and Price. A pared-down version is also available to individual investors.
The people and parent ratings are a combination of both quantitative and qualitative assessments, while performance, portfolio and price are strictly quantitative.
Based on this criteria, Morningstar found the target-date funds from Vanguard to be the best and those from Oppenheimer to be the worst. Vanguard’s stock selection held up better than peers, Morningstar said. Besides this prudent management and long-tenured portfolio managers, its target-date funds also offer low fees and a high level of transparency, according to the research firm.
Oppenheimer’s funds performed very poorly in 2008, Morningstar said, which was only further compounded by the highest fees among all of the 20 target-date fund families.
“Target-date funds serve as the core holding for millions of investors as they plan for retirement, often as the only holding, and they are increasingly an automatic default option within defined contribution plans,” noted Laura Pavlenko Lutton, editorial director in the mutual fund research group at Morningstar. “Because they play such a pivotal role in today’s portfolios, it’s critical for investors to select or have access to a high-quality target-date fund from an investor-focused fund family.
“Our new ratings and research reports are designed to help individual investors, financial advisers and plan sponsors make the best possible decisions when evaluating a series of target-date funds,” Lutton added.
There is room for improvement among target-date funds, Lutton said, especially with respect to fees, since they are designed to be held for many years, even decades.
“Transparent, easily accessible information on the rationale or research behind fund companies’ asset allocation is rare,” she added.