Target-Date Funds Don't Get Much Better Than This

The following is our latest Fund Analyst Report for BlackRock LifePath Index LIRKX. Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

BlackRock LifePath Index's forward-thinking management team, research-intensive process, extremely low costs, and high-quality building blocks place this series among the industry's very best options. It continues to earn a Morningstar Analyst Rating of Gold.

BlackRock's history with target-date funds stretches back to the 1990s, but most importantly, the firm has remained steadfast in evolving its target-date options over the decades, often exploring new areas of research before peers. The firm's target-date glide path and asset-allocation research, led by Matt O'Hara since 2014, has led to some significant changes and unique aspects. Management’s active research agenda and its willingness to enact meaningful changes--including those that put it at odds with most peers--to improve participant outcomes give us confidence in the team staying at the forefront of the target-date industry over the long term.

The most recent significant change occurred in November 2014, when management upped the series' equity allocation across most of the glide path based on research into investor preferences and behavior, as well as a review of its long-term capital market assumptions. The longest-dated funds remained unchanged, with 99% of assets in equities, considerably more than the typical peer. The other funds in the series had previously been equity-light compared with peers, but they now have more or a similar amount.

There are two distinguishing features to the series' strategic asset allocation. The funds furthest from retirement have sizable overweights to REITs compared with peers, and, as the series gets closer to retirement, its allocation to small company equities increases. The former is due to the long-term inflation-hedging properties of real estate, and the latter is due to small caps having better diversification benefits when paired with bonds than large companies. It also notably does not include international bonds because of the costs of currency hedging.

The series' low costs cement this strategy as a topnotch long-term holding for investors.

Process Pillar: Positive | Jason Kephart, CFA 01/25/2019

BlackRock's ability to retain a forward-thinking, research-intensive approach over the years drives this series' Positive Process rating. While the team's research doesn't always support a change, it resulted in a sizable glide-path shift at the end of November 2014. At that time, management upped this series' equity exposure by 2 to 16 percentage points across the glide path. Further research into investors' behaviors and preferences, as well as updated capital market assumptions, sparked the change.

The series remains among the industry peers that halt asset-allocation shifts at the retirement date. Funds roll into the Retirement fund upon reaching their respective target dates, and that fund keeps 40% of assets in equities throughout the retirement phase. The 40% equity stake at the target date comes in just below the industry average. The equity exposure for the series' longest-dated funds generally exceeds the typical peer. The managers here do not deviate from the strategic glide path to boost returns.

Within the equity allocation, the funds don't stick to a fixed U.S./international split across the glide path, as the team's efficient-frontier optimization drives the mix. A relative bias toward larger-cap stocks in longer-dated funds' U.S. equity allocations also stands out, as does those funds' sizable exposure to REITs. The allocation to small caps increases over time as they offer better diversification in bond-heavy portfolios.

Management populates this series with well-regarded BlackRock index-based strategies to cover a variety of asset classes. The firm divides its exposure to U.S. equities between a large-cap index fund and a small-cap index fund, unlike some index-based target-date competitors that use a single broad index to provide market-cap-weighted exposure to U.S. stocks. The series' portfolio-optimization approach actually results in a rising allocation to small-cap stocks as investors move along the glide path. The optimization finds that small-cap stocks provide greater diversification benefit within a bond-heavy portfolio.

The series stands out with its sizable exposure to REITs. In the fourth quarter of 2016, management replaced two exchange-traded funds--one domestic and the other international--with a single global REITs index strategy, iShares Developed Real Estate Index BKRDX. The new holding provides similar exposure at a lower cost. IShares Core MSCI Total International Stock ETF IXUS and iShares MSCI Total International Index BDOAX provide exposure to non-U.S. equities.

The target-date funds' fixed-income investments include iShares U.S. Aggregate Bond Index BMOAX (which follows the Bloomberg Barclays U.S. Aggregate Bond Index) and iShares TIPS Bond ETF TIP (benchmarked to the Bloomberg Barclays U.S. Treasury Inflation Notes Index).

Performance Pillar: Positive | Jason Kephart, CFA 01/25/2019

This series has generally posted strong absolute and risk-adjusted results since its 2011 launch. Its Performance rating has been upgraded to Positive from Neutral. Over the five-year period through December 2018, the funds outpaced 80% of peers on average. Both the shortest-dated Retirement fund and the 2055 fund--the longest-dated fund with a five-year record--beat more than 90% of Morningstar Category peers over that period; the funds between them generally landed in the second quartile. Management’s decision to up the equity exposure across the series in November 2014 generally benefited the series over that time period.

The funds posted decent results relative to peers in 2018. The series’ relatively large stake in REITs, which failed to keep pace with stocks in 2017, helped performance in 2018. The passive core bond exposure was also beneficial during the equity market sell-off in the fourth quarter thanks to its high-quality bias; its 1.51% return for the quarter nearly doubled the average peer.

While BlackRock's legacy target-date offering offers a longer-term track record, investors shouldn't look too closely at those funds to help set expectations here. The older series fared relatively well in market downturns, such as those seen in 2008 and 2011, but investors can expect those patterns to reverse or become more muted in the future following the series' shift to a more equity-heavy glide path in late 2014.

People Pillar: Positive | Jason Kephart, CFA 01/25/2019

This target-date series is led by a deep and experienced team with ample resources. It earns a Positive rating for People.

Matt O'Hara, who became a named manager in November 2016, has long been involved in the design of BlackRock's target-date offerings in his role leading the firm's defined-contribution research. For instance, O'Hara and his team's research into investor preferences and behavior drove the increase to the series' equity allocation across most of the glide path in late 2014. He is the only common manager across the firm's three target-date offerings because of his overarching influence on the asset allocation and glide path. In July 2018, the model portfolio solutions team, led by Lisa O'Connor, was merged into the LifePath team. O'Connor now oversees the asset-allocation research for the firm’s target-date series. The depth of the research team that backs O'Hara instills confidence that this series will remain on the forefront of the target-date industry.

The series' other named portfolio managers--Greg Savage, Alan Mason, and Amy Whitelaw--focus on executing the strategy. As head of BlackRock's U.S. index asset-allocation team, Savage carries most of the funds' day-to-day management responsibilities, while Mason and Whitelaw provide general oversight. The series invests in a suite of BlackRock index-based funds. BlackRock has extensive resources in that area.

Parent Pillar: Positive | 11/01/2018

BlackRock's successful balancing act retains a positive Parent rating.

The $6.3 trillion colossus' institutional and retail clients span the globe, and its publicly traded shares have beaten virtually all industry peers and most fellow S&P 500 denizens since the company's 1999 IPO. Both its clients and public shareholders have high expectations, but BlackRock has shown it understands it must be a capable fiduciary to keep delivering enviable long-term stock returns. Its investment fees continue to fall and managers invest more in their strategies. The firm invests heavily in technology and people and makes versions of its institutional risk and portfolio analysis tools available to advisors. Its iShares unit's efforts to defend its leading exchange-traded fund market position has helped drive asset-management costs down. The firm has expanded into alternatives and private equity.

Biggest is not always best, though. BlackRock has turned around its fixed-income platform since the global financial crisis, but its active equity lineup has sputtered and been through two major restructurings in six years. Its manager retention and tenure rates for U.S. mutual funds are lower than most other top 20 fund families. While it has shown more fund launch discipline, it has its share of niche vehicles, such as the iShares Robotics and Artificial Intelligence ETF.

Still, BlackRock has used its size and operational savvy to clients' benefit.

Price Pillar: Positive | Jason Kephart, CFA 01/25/2019

This series remains one of the lowest-cost options available, supporting its Positive Price rating. The series’ K share class--the least expensive share class, which has more than 85% of the series’ mutual fund assets--has expense ratios ranging from 0.10% to 0.11%. Those costs are just 2-3 basis points higher than cheapest target-date mutual fund and are well below the 0.46% to 0.54% median for peers’ share classes also aimed at large retirement plans. Less than 10% of assets are in the series' Investor A share class, which has expense ratios ranging from 0.40% to 0.41%. That may be lower than most similarly distributed peers, but it is still pricey for an index-based offering. The remaining assets are in the Institutional share class, which comes with fees 5 basis points higher than the K share class.