Morningstar and Lipper plan to release style categories later this quarter for asset allocation funds designed for defined contribution plans. The new categories are significant because most research firms lump target date and lifestyle funds into variations of Morningstar’s classic style categories, such as large-cap growth or mid-cap value.
Lipper researchers say the categories are necessary because asset allocation funds are a fast-growing category and investors need a frame of reference to make apples-to-apples comparisons. “We think it’s a growing trend and they’re here to stay,” said Jeff Tjornehoj, an analyst. Lipper’s forthcoming initial target-date categories--2010, 2020 and 2030--and lifestyle categories--conservative, moderate and aggressive--address the problem, he said. In the new categories investors and advisors will be able to compare Lipper Leaders metrics, which measure total return, consistent return, preservation, tax efficiency and expense, against similar investments, Tojehenoe said.
Morningstar said it plans to launch five new style target-date style categories and one “broad asset class” category for DC-specific funds effective Feb. 28, said spokeswoman Martha Conlon Moss. The forthcoming Morningstar style categories are Long-Short, Inflation-Protected Bond, Target-Date 2000-2014, Target-Date 2015-2029, and Target-Date 2030+. “Investors who are looking for a target retirement fund really need to compare them against other funds with similar retirement dates,” said Russel Kinnel, director of mutual fund research at Morningstar.
The categories are needed to help investors use the funds correctly, Tojehenoe said. For example, a participant may feel compelled to compare 2010 and 2020 funds because both investments are currently slotted into Lipper’s “Flexible” or “Balanced” category. The first is a group of funds with the freedom to invest in any mix of equities and fixed-income, while the latter is a closer ratio of fixed-income and equity. But only one of the investments actually coincides with the individual’s planned retirement date. “If somebody looks at a 2020 with high ratings and a 2030 with lower ratings they may be tempted to go with the 2020,” he said.
Lipper researchers will also reallocate lifestyle funds into the three new Conservative, Moderate and Aggressive categories from their positions in the firm’s Balanced and Flexible categories throughout 2006.