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Ratings Upgrades and Downgrades for U.S. Target-Date Series

An updated ratings methodology brings a few notable changes.

Janet Yang, CFA, 02/09/2016

Target-date series have steadily become a popular retirement savings strategy for Americans during the last decade. At the end of 2015, assets in target-date mutual funds stood at $763 billion, up from $703 billion the year prior. Morningstar has rated these thriving strategies since 2009, and our most recent quarterly review of those Analyst Ratings produced a few notable changes. 

Some of the ratings changes stem from an update we've made to how we rate target-date series. Details behind the methodology update and Morningstar's current target-date series methodology paper can be found in the Research Library on Morningstar's corporate website. To summarize: Previously, a series' Performance and Price Pillar ratings and half of its Process Pillar score were set by a quantitative formula. Now, analysts qualitatively determine all aspects of the ratings, which also include the People and Parent Pillars, as well as the overall Morningstar Analyst Rating. Of course, quantitative considerations continue to remain important inputs to many aspects of the pillar and overall ratings.

The table below summarizes the seven target-date series that saw changes in their Analyst Ratings, as well as the two series new to coverage.

(One nuance to point out: The Analyst Rating for target-date series is separate from the Analyst Rating for individual funds. The latter applies to all mutual funds and has always been qualitatively set by analysts; the methodology change for the target-date series rating brings it in line with the fund rating because both are now qualitative. A target-date series, such as BlackRock LifePath Index, includes individual vintage-year funds, such as BlackRock LifePath Index 2055 LIVKX and BlackRock LifePath Index 2050 LIPKX.)

Familiarity Breeds Confidence
Three of the upgrades reflect Morningstar's growing confidence in newer or altered strategies. We upgraded the BlackRock LifePath Index series to Gold from Silver after years of meetings with management and analysis of the portfolio details. BlackRock only launched the series in 2011, but the firm's long history in target-date management dates back more than two decades. It has remained at the forefront of target-date research since then, with a well-documented research agenda that continually re-examines the asset mix and considers potential new asset classes to include in the series' investments. The series already had a Positive Process Pillar rating, but a steady flow of evidence showing the team's forward thinking in the space gave analysts confidence to make the series one of their highest-conviction picks. The series has a meaningful cost advantage over peers as well. Its 0.18% asset-weighted expense ratio undercuts its typical competitor by almost 60 basis points.

Meanwhile at Fidelity, portfolio managers Andrew Dierdorf and Brett Sumsion are wielding their relatively newfound tactical management flexibility. The team has seen some success making short-term allocation moves since adding the feature to Fidelity Freedom and Fidelity Advisor Freedom in August 2014, though it's years from proving it can consistently do so. These moves are unlikely to derail the strategy or offset the strength of its underlying funds because the team stays true to operating within tight tracking-error bounds--within 150 basis points. This led us to upgrade the series' overall ratings to Bronze from Neutral.

In fact, the two series use some of the industry's most well-regarded managers, a foundation for the series' Positive People ratings and upgraded overall ratings. On the equity side for Fidelity Freedom, these managers include Steve Wymer, Joel Tillinghast, and Will Danoff, who account for nearly one fifth of Freedom 2050's FFFHX assets. Those managers run funds that receive Morningstar Analyst Ratings of Silver. Investors nearer to retirement--who also tend to have more at stake because of their larger savings balances--particularly benefit from the firm's fixed-income team, which Morningstar considers to be among the best.

Janet Yang is a fund analyst with Morningstar.

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