Target-Date Deep Dive: American Funds

Susan Dziubinski:

Hi, I'm Susan Dziubinski with Morningstar. As the default option in many employer-sponsored retirement plans, target-date strategies play important roles for many investors. We're there for taking a deep dive into some of the largest target-date providers. Today, we're diving into the target-date series from American Funds with Megan Pacholok. Megan is an analyst with Morningstar's Global Multi-Asset Funds Research team.

Hi, Megan. Nice to see you.

Megan Pacholok:

Nice to see you, too, Susan.

Dziubinski:

Let's start by talking about how big a presence American Funds is in that target-date space. How does it rank compared with, say, Vanguard or Fidelity?

Pacholok:

American Funds, their total target-date assets actually ranks fifth across the industry and their market share, including both their mutual fund and CIT offering, is about 7% to 8%.

Dziubinski:

Now, American Funds offers just one series that features actively managed funds, is that right?

Pacholok:

That's correct.

Dziubinski:

And then, why does it offer just the one series when many providers offer more than one?

Pacholok:

It's a way for them to really put their best thinking forward in terms of saving for retirement and also a way for them to feature their standout underlying funds.

Dziubinski:

Megan, tell us a little bit about what are some of the things that Morningstar likes about the series, and what do we rate it?

Pacholok:

American Funds Target Date Retirement Series earns a Morningstar Analyst Rating of Gold, which is actually our highest-conviction rating. One thing that we really like about this series is the underlying funds. The underlying active equity funds, most of them earn a Morningstar Medal of Gold or Silver, again showing our high conviction in those strategies. But one thing we also like about it is the way that those active equity funds are interacting with their active bond funds. Those bond funds are actually providing a lot of capital preservation in terms of those equity drawdowns. So, it's really a smart match for that series.

Dziubinski:

And then, are there things that investors who invest in this series should be aware of, maybe some things that make this series different from the series of some other providers?

Pacholok:

This series actually has a strong overweight to large-cap equities. And that has contributed well for its long-term success because it is one of the best longer-term performing series. However, if things were to shift and small caps were to rally for an extended period of time, that could be a bit of a headwind for this series.

Dziubinski:

Megan, thank you so much for your insights into the American Funds Target Date Series today. We appreciate it.

Pacholok:

Thanks for having me, Susan.

Dziubinski:

I'm Susan Dziubinski with Morningstar. Thanks for tuning in.