How Do Vanguard’s Target-Date Funds Stack Up?

Ivanna Hampton: Here’s what’s ahead on this week’s Investing Insights. Target-date funds offer an easy way to save for retirement. Hear why Vanguard’s target-date series is considered a safe option but not the best. Plus, the owner of Cash App pushes back against a short-seller’s claims that it’s built on fraud. And the head of Morningstar’s electric vehicle committee shares his EV supply chain stock picks. This is Investing Insights.

Welcome to Investing Insights. I’m your host, Ivanna Hampton. Let’s get started with a look at the Morningstar headlines.

Short-Seller Claims Cash App Built on Fraud

Hindenburg Research has made several claims against Block SQ in a new report. The short seller says Block’s Cash App business has been built through fraud and that the platform is being used to perpetrate criminal activity. Morningstar has reviewed the report and finds the claims largely anecdotal. More potentially troubling are claims that Block is not only aware of widespread fraud but is complicit in developing internal procedures and weak compliance measures that make it easy to use the platform for fraud. Hindenburg also claims that Block is inflating user metrics. However, this allegation appears to rest almost entirely on claims from former Block employees. Block released a statement saying it plans to quote “work with the SEC and explore legal action against Hindenburg Research for the factually inaccurate and misleading report.”

Morningstar is reiterating its Very High Uncertainty Rating for Block. The long-term economics of the Cash App business are very difficult to predict. A significant factor is that the regulatory framework for the peer-to-peer space is far from settled. Morningstar is maintaining its $104 estimate of Block’s stock.

T. Rowe Price Faces Headwinds

Weaker stock and credit markets are dimming the current outlook for T. Rowe Price TROW. Its assets under management dropped nearly 25% in 2022. Investors pulled money from the firm’s stock and bond funds as they suffered big losses in last year’s tumultuous market. Falling technology and other growth stocks hit T. Rowe hard, because most of its equity funds lean toward growth. Morningstar thinks T. Rowe’s asset base growth will remain anemic through 2027 due to expected weaker stock and bond markets. Demographics should help T. Rowe over the longer term, though. Inflows could pick up after 2025 as fewer baby boomers retire and draw down their nest eggs while millennials start building theirs. Morningstar thinks T. Rowe’s revenue will grow about 2% over the next several years. But it has reduced what it thinks T. Rowe’s stock is worth—from $120 per share to $110.

Vanguard Dividend Growth Manager to Step Down

The leadership transition is underway at Vanguard Dividend Growth VDIGX. The investment management company announced manager Donald Kilbride will step down on Jan. 1. Comanager Peter Fisher will replace him. Fisher joined the team in July of last year. Morningstar’s analysts have placed the strategy, which carried a High People rating, a High Process rating, and a Morningstar Analyst Rating of Gold, under review. Fisher and Kilbride have worked together on other ventures over the years and have an excellent track record so far. Fisher took over the Wellington Global Dividend Growth separate-account strategy from Kilbride in 2016 with successful results. Kilbride will remain with Vanguard as the leader of the company’s Advice Select Dividend Growth team.

Investing in the Battery Electric Vehicle Supply Chain

Electric vehicles’ popularity is accelerating. Morningstar has forecast that EVs will make up 40% of new auto sales worldwide by 2030. And investors may want to look at the EV supply chain for opportunities. Morningstar Research Services’ equities strategist Seth Goldstein leads Morningstar’s electric vehicle committee.

Hampton: Seth, you’re going to appear on a panel at the Morningstar Investment Conference in April. Can you give us a quick preview?

Seth Goldstein: We’re going to help investors analyze the battery electric vehicle supply chain to determine the best ways to invest in the transition to electric vehicles.

Hampton: Let’s get into the news. The Inflation Reduction Act provides up to a $7,500 tax credit for buying an electric vehicle. What role do you see this tax credit playing in the transition to electric vehicles?

Goldstein: I think this will help make EVs more affordable for consumers in the U.S. and for consumers where price has been a sticking point and has caused hesitation to buy an EV. This will get people across the line. And then we’ll likely see greater EV adoption in the U.S. and help the U.S. catch up to EV sales that we’ve seen in places like China and Europe.

Hampton: Seth, your forecast says that 40% of auto sales by 2030, the new auto sales will be electric vehicles. Let’s talk about the public-charging network. What’s being done to expand it?

Goldstein: Well, the infrastructure bill that was passed in 2021 is going to allocate billions of dollars to build roughly a half a million fast chargers along U.S. highways, which should help consumers overcome road trip anxiety where consumers fear they can’t take a road trip in an EV. And one of the big reasons why is that there’s nowhere to charge. And so, as we see more chargers getting built, that’ll help give consumers greater confidence that an EV is a suitable vehicle and can meet all their functional needs, which will likely lead to more EVs being sold.

Hampton: EV batteries need lithium. What is the outlook for the lithium industry?

Goldstein: EV lithium is one of the industries that will be most directly impacted by rising EV adoption because all EV batteries do need lithium. So, we expect lithium demand will more than triple between 2022 and 2030 from around 800,000 tons in 2022 to over 2.5 million tons by 2030, which should keep lithium prices high and create excess returns for low-cost lithium producers.

Hampton: EVs need more electrical components than gas-powered cars. What are the opportunities there for investors?

Goldstein: When we look at an electric vehicle, it needs roughly double the content of electrical components from a revenue-per-vehicle standpoint versus an internal combustion engine. So, for these electrical component suppliers, this creates a large opportunity to meet a growing end market from the transition to EVs.

Hampton: And what are your stock picks?

Goldstein: When we look upstream in lithium, we like Albemarle ALB and Lithium Americas LAC. Looking at specialty chemicals, which also need more content per vehicle, we like Celanese CE as a top pick. Looking at the electrical component space, we like Sensata ST as a top pick. And then when we look at traditional auto suppliers, BorgWarner’s BWA rapidly electrifying their portfolio, so they should benefit and grow profits from this transition to EVs. Then finally, when we look at the automakers themselves, we like Ford F and GM GM as two legacy automakers who are rapidly electrifying their portfolios as well and should benefit from the transition.

Hampton: Well, Seth, thank you for your time today.

Goldstein: Thanks, Ivanna.

Has Vanguard’s Target-Date Series Lost Its Edge?

Hampton: Vanguard’s target-date fund is considered a “safe option.” Intensifying competition has raised the stakes for the title of the “best.” Morningstar Research Services’ senior manager research analyst Megan Pacholok and director of multi-asset ratings Jason Kephart share their insights.

Megan Pacholok: Has Vanguard’s target-date fund lost its edge? I’m Megan Pacholok, a senior analyst on Morningstar’s manager research team. Joining me today to answer that question and highlight some of Morningstar’s top target-date picks is Jason Kephart, director of multi-asset ratings.

Hello, Jason.

Jason Kephart: Hi, Megan. Thanks so much for having me.

Pacholok: Let’s get right into it. Vanguard’s target-date strategy is the largest in the industry. It holds over $1 trillion across its mutual fund and collective investment trusts and makes up about 38% of the total target-date assets. And it’s really not showing any signs of slowing down. In 2022, it gathered the most net new money and that marked the ninth out of last 10 years that it was able to do so. Jason, why is Vanguard’s target-date fund so popular?

Kephart: That’s a great question, Megan. Vanguard’s target-date series is really popular for a lot of the same reasons Vanguard is. It offers a no-frills approach to saving for retirement. It’s broadly diversified across global equities and bonds, and it’s offered at a very cheap price. Its mutual funds only cost 8 basis points, and its CITs are even cheaper. That’s a really hard option for investors and plan sponsors to pass up. We’ve seen a number of excessive-fee lawsuits targeting 401(k) plans. So, in that sense, Vanguard is a very safe option, and it’s also proven to be pretty reliable over the last decade.

Pacholok: So, it’s a safe option. But is it the best option?

Kephart: It has a Morningstar Analyst Rating of Silver. So, we think it’s a very good option. But we do have a couple of series that we think have a little bit of an advantage that are rated Gold. You mentioned earlier has Vanguard lost its edge? I won’t say it’s lost its edge, but it’s not as sharp as it used to be. If we look back a decade ago, it had a really huge advantage in fees. But over time, as more target-date funds have gotten more competitive in cost, that fee advantage isn’t what it used to be. Now, there are also a number of series that charge just as much as Vanguard and have been a little bit more proactive in terms of making changes we think are going to benefit shareholders in the future.

Pacholok: Jason, you alluded to other target-date strategies having an edge over Vanguard. Let’s name names.

Kephart: BlackRock LifePath Index. It’s the only target-date fund that’s all index-based that we recommend with a Gold rating. What we really like about this series is, one, it’s cheap. Its cheapest share classes are about the same cost as Vanguard’s. But we think the management team has been just a little bit more proactive in terms of making changes. BlackRock’s team was one of the first in the industry to move to nearly all equity in the beginning of its glide path, and we think that makes a lot of sense. If you’re betting on stocks outperforming bonds over 15 or 20 years, that’s a pretty safe bet. And what we’ve seen in terms of investor behavior is that those target-date investors furthest from retirement tend to be able to ride out market volatility a lot better than those closer to retirement. So, we’re not really worried about people making bad decisions based on market volatility when it’s just a little bit more volatile. So, we think that’s a really good option for investors.

Pacholok: That’s really interesting, Jason. So, both Vanguard and BlackRock LifePath Index use passive funds as their underlying exposures. For investors that prefer active funds as that underlying exposure, what does Morningstar recommend?

Kephart: We have a couple of series we really like that are all actively managed at the underlying level. American Funds Target Date Retirement and T. Rowe Price Target Retirement are both rated Gold. Both of these firms are really well-known for their really good actively managed equities. In American Funds, I think their bond funds kind of fly under the radar sometimes. They’re really good at being bond funds when there’s equity market volatility. So, we really like that kind of portfolio construction they’ve got going on there. And Capital Group has also put a lot more resources in their multi-asset team over the last couple of years. So, we’re pretty confident it’s going to continue to be a really good option going forward.

At T. Rowe Price, I don’t think their fixed-income funds are as impressive. But their multi-asset team is exceptional. It’s like finding a great chef. You don’t necessarily have to have all the best ingredients to make a best meal. But obviously, we know that all active or all passive, that’s not the only choice investors have when it comes to choosing a target-date fund. Megan, you cover a couple of series that blend both active and passive together. What do you like about those?

Pacholok: That’s right, Jason. These blend target-date strategies are really showing you that investors don’t have to select an all-active or an all-passive option. And in some cases, we have seen target-date managers really efficiently navigate between those two, choosing a passive fund in more efficient markets that helps them keep costs lower for the overall series and sticking with and holding on to those active managers that they have a lot of high conviction in and can really provide an edge over the long run. So, in this case, with the blend target-date strategies, investors are really getting the best of both worlds.

Kephart: Which series are your favorite?

Pacholok: Well, Morningstar analysts cover a number of blend strategies, and we rate two of them Gold: T. Rowe Price Retirement Blend and Pimco RealPath Blend.

Kephart: Those are both great options.

Pacholok: Jason, thank you for joining me today to highlight Morningstar’s top target-date picks.

Kephart: Thanks for having me.

Pacholok: From Morningstar, I’m Megan Pacholok helping you stay on target.

Hampton: Thanks Megan and Jason.

Subscribe to Morningstar’s YouTube channel to see new videos from our team. Thanks to senior video producer Jake Vankersen, lead technical producer Scott Halver, and craft producer David Ettinger. I’m Ivanna Hampton, your host and, a senior multimedia editor at Morningstar. Take care.

Read About Topics From This Episode

Short-Seller Hindenburg Claims Block’s Cash App Is Built on Fraud

T. Rowe Price Continues to Face Headwinds Created by a Rising Interest-Rate Environment

Vanguard Dividend Growth’s Longtime Manager to Step Down in 2024