Bringing the Morningstar Analyst Rating to Target-Date Series
Our updated methodology awards medals to 10 series.
Morningstar launched its Target-Date Series Ratings and Reports in the fall of 2009 to cast some light on a fast-growing pocket of the mutual fund industry that had received little systematic scrutiny. Since then, target-date funds have continued their boom in size and importance. By year-end 2012, assets in target-date mutual funds totaled $485 billion and have become the most common way for Americans to save for retirement. Morningstar's target-date reports and ratings have become a key tool for those designing retirement plans as well as for those investing in the funds.
Since Morningstar first released the target-date series ratings and research in 2009, the highly rated series have done well for their fundholders. From Sept. 30, 2009, to Oct. 1, 2012, the funds from target-date series that earned Top or Above Average ratings beat their category average on a risk-adjusted basis 100% and 87% of the time, respectively. In addition, the Top and Above Average series generated an average Morningstar Risk-Adjusted Return that exceeded the category average by 1.21 and 0.60 percentage points annually. (See Table 1.) Average-rated funds have also fared well. Funds that earned Below Average and Bottom ratings, by contrast, exceeded their category average 67% and 14% of the time, respectively, and none earned MRARs that exceeded the category average. To be sure, the sample size is small (about 20 series) and it's still early in the history of these ratings, but we're encouraged by the results and will continue to track them.