Citing the vast disparity in the performance of target-date funds, Morningstar by year-end will begin rating and researching target-date funds to make them more transparent and more easily comparable, for professional and retail investors alike, the research firm announced Thursday.
Target-date funds have come under scrutiny in recent months, said John Rekenthaler, vice president of research. Disparity in the performance in 2008 among funds with the same target-date caused many to second guess the funds investment policies and strategies, leading to the joint hearing before the SEC and the Department of Labor next month. Surprise about these variations in performance reveals the lack of knowledge about this new, fast-growing category of mutual funds.
Morningstar will annually examine target-date funds via five measures, two qualitative and three quantitative: people, parent, performance, portfolio and price. The best score a fund can receive is 100, with a maximum of 20 for each measure. Each scoreabove average, average, below average or bottomwill be accompanied by detailed commentary by a Morningstar fund analyst.
Many investors intend to hold their target-date funds for decades and use them as a primary retirement savings vehicle, Rekenthaler added. Its critical to invest in funds run by companies that have a strong history of putting shareholders first.