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This Target-Date Series Stands Above Its Peers

Top-rated BlackRock Lifepath Index follows a path worth traveling.

The following is our latest Fund Analyst Report for BlackRock LifePath Index 2030 K (LINKX). 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 stands above peers thanks to its management team’s dedication to progressive research and the series’ low costs. We have downgraded the series’ Process Pillar rating to Above Average from High due to the inherent limitations of a passive-only target-date fund. The series continues to earn a Morningstar Analyst Rating of Gold for its two cheapest share classes. Its two more-expensive share classes earn Silver ratings.

BlackRock has remained steadfast in evolving its target-date options over the decades, often exploring new areas of research before peers. Since its 2011 inception, this series’ glide path has stood out as one of the most aggressive furthest from retirement, with a target 99% stake in equities, nearly 10 percentage points higher than the industry norm. In November 2014, the firm’s glide path and asset-allocation research, led by Matt O’Hara, increased the equity stake at nearly every other point along the glide path, putting the series’ glide path above the norm for nearly the entire path to the target-retirement date. The higher allocation to equities lowers the risk of shareholders outliving their assets in retirement, particularly since research has shown target-date fund investors tend to be hands-off and less likely to react to bursts of volatility.

In 2019, management lowered the series’ early overweight to global REITs to 5%, from 16%, to put more emphasis on growing assets early, through broader equity index funds. The team’s willingness to revisit, and reverse, prior assumptions is another sign of its forward-thinking nature.

This series only invests in passive index funds, which helps keep costs very low, but also gives management fewer tools to outperform compared with more active strategies that can tactically tilt the portfolio, select talented active managers, and access asset classes not suitable for indexing, like bank loans. Still, over the long term we are confident in management’s ability to evolve to best serve shareholders.

Process | Above Average 
BlackRock's ability to retain a forward-thinking, research-intensive approach keeps this series a step ahead, but passive-only target-date series have limited means to outperform compared with more active peers. The series' Process Pillar rating has been downgraded from High to Above Average.

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, which puts it higher than most peers throughout the glide path. Further research into investors' behaviors and preferences, as well as updated capital market assumptions, sparked the change. In 2019, the team revisited its research on inflation-hedging assets throughout the glide path and removed the series’ sizable overweight in global REITs early in the glide path since inflation isn’t a significant concern given the long horizon until the retirement date.

Management populates this series with well-regarded BlackRock index-based strategies to cover a variety of asset classes. This does help keep costs extremely low, but the trade-off is a more limited tool kit than series that use active managers. In fixed income, for example, active managers can make quicker adjustments to duration or access more niche asset classes like bank loans.

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 retirement. 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 does stand out compared to the S&P Target Date benchmarks. The allocation to small caps increases over time as the team’s research finds that small-cap stocks offer better diversification in bond-heavy portfolios.

The portfolio holds roughly 60% in U.S. equities and 40% in international equities at the beginning of the glide path, but it gradually skews closer to 70% U.S. equities as the series nears retirement. Although there is no dedicated emerging-markets equity index fund, the iShares Core MSCI Total International Stock Index (IXUS) the series uses has a 7% weighting in that asset class.

People | High
This target-date series is led by a deep and experienced team with ample resources. It earns a High 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, further bolstering this team’s asset-allocation resources. 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 | Above Average 
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.

This series has generally posted strong absolute and risk-adjusted results since its 2011 launch. Over the five-year period through December 2019, 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 landed in either the first or second quartile. Management’s decision to raise the equity exposure across the series in November 2014 has generally benefited the series since then.

The funds posted strong results relative to peers in 2019. The strong rebound in equity markets following 2018’s fourth-quarter sell-off was a tailwind to the series thanks to its higher equity allocations. The timing of reducing the weight to global REITs was also beneficial as those securities predictably underperformed during the strong equity market rally.

While BlackRock's legacy target-date offering has 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.

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar Category’s cheapest quintile. Based on our assessment of the fund’s People, Process, and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Gold.

Jason Kephart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.