This is a hidden column


Institutional Categories for Objectives-Based Investing

New peer groups include income and inflation protection strategies

Janet Yang


Objectives-based funds have caught investors' attention in recent years, and it's easy to see their appeal.

Objectives-based funds (which are sometimes known as outcomes-based or goals-based investments) generally seek to address specific investor preferences or problems, such as a desire to have a predicable stream of income in retirement or to combat inflation. This stands in contrast to most funds' relatively abstract attempts to provide exposure to a certain asset class and beat a market benchmark, such as an actively managed large-cap growth fund that's measured against the Russell 1000 Growth Index.

The advantages and disadvantages of objectives-based investing

Whether these objective-based funds represent a true advance for investors compared with more-traditional funds remains an open question.

We explored similar issues in our 2016 paper, "Objectives-Based Investments: No Easy Answers to Complex Problems." Our research has found that objectives-based funds often deliver on their promises, though those same objectives could’ve been met far more simply—and at a sharply reduced cost—through an index-based balanced portfolio.

Still, one can make an argument that getting investors to focus on objectives can help them stick to an investment plan, which can be especially important during periods of declining markets and increased volatility. Morningstar's research has found that in such markets, investors are more likely to sell their investments and miss out on the beginnings of a subsequent rally, thus permanently damaging their capital.

Meanwhile, investors considering objectives-based funds should keep a few key considerations in mind. While they may pursue similar objectives, the interpretations of those objectives may differ. And the implementation of even very similar objectives can vary widely. All of these issues add to the general difficulty with properly benchmarking these funds.

Morningstar Institutional Categories make objectives-based funds easier to identify and compare  

These funds can approach similar objectives in very different ways, causing funds with the same objective to span several Morningstar Categories and complicating the comparisons of these funds.

To help investors identify objectives-based funds and their peers, we recently augmented our Morningstar Institutional Categories with the more commonly used objectives-based fund types. At the end of April 2018, we added the following Morningstar Institutional Categories:

  • Multi-Asset Income
  • Multi-Asset Retirement Income
  • Multi-Asset Inflation Protection

Institutional categories don’t replace a fund's primary Morningstar Category assignment. The funds still reside in their existing Morningstar Categories (such as world allocation or tactical allocation), and performance rankings and Morningstar Ratings continue to be driven by categories. Institutional categories are assigned in addition to the Morningstar Category to allow investors to more easily identify and compare these types of funds.

A closer look at the three new institutional categories

The three new Morningstar Institutional Categories include funds that address distinct objectives.

Multi-asset income funds by-and-large operate under mandates to deliver relatively high yields. They've soundly done so, as seen in the graph below:

Multi-asset income funds generally deliver on their objective, providing a higher average yield than the typical non-income-focused allocation fund. Source: Morningstar Direct, as of March 31, 2018


Multi-asset income funds’ distinction from multi-asset retirement income funds is subtle: The latter also seek higher income, but with an emphasis on stability in payment amounts and predictability in the timing of those payments for retirees. These funds have seen a few changes in recent years, so longer-term performance indicators won't accurately describe the current body of funds.

On a shorter-term basis, the funds' average 12-month yield trails markedly behind that of the average multi-asset income fund and is only slight higher than other allocation funds'—as shown in the graph below:

The typical retirement income fund has a yield that's only slightly higher than non-income oriented peers' and notably less than those of general multi-asset income funds. Source: Morningstar Direct, as of March 31, 2018


Meanwhile, multi-asset inflation protection funds strive to keep investors' savings in step with, if not ahead of, inflationary pressures. Based on these funds' rolling three- year returns over the past five years, their results have been mixed, as shown in the graph below.

Multi-asset inflation protection Funds have a mixed record of delivering on their objective to stay ahead of inflation. Source: Morningstar Direct, as of March 31, 2018


We explore the important considerations within each of these three new institutional categories further in our white paper, “Objectives-Based Institutional Categories.”

To access our new objectives-based institutional categories, try Morningstar Direct.

Take a Free Trial

The Morningstar Retirement Quiz for Advisors

Test your knowledge and get ideas for helping your clients.

Trending Research

Get our latest in-depth analysis and differentiated industry coverage.

Our HSA Rankings

Read how we evaluated 11 of the largest health savings account providers.