Morningstar - Q4 2022 - 25

lower stock exposure for 10 to 15 years after the
retirement date. The key difference between these
approaches is typically the amount of stocks
they own at the target retirement date. At the end
of 2021, the median " to " glide path had a 35%
allocation to stocks at retirement, and the median
" through " glide path had a 52% allocation to stocks.
One of the arguments in the lawsuits is that the
underperformance of BlackRock LifePath Index's
2025 vintage compared with the limited peer
group should have triggered a change. Although
BlackRock's 2025 vintage has underperformed
those peers, it's because it follows a " to " approach,
which means it has less equity exposure as it gets
closer to the target retirement date. The other
hand-picked peers all follow " through " approaches
and have a higher exposure to equities close
to retirement.
EXHIBIT 1 illustrates the growth of $10,000 for the
cheapest share class of the six series' 2025
vintage and the Morningstar Category average
from May 2011, when BlackRock LifePath Index
was launched, through July 2022. BlackRock's
underperformance versus the five peers
can largely be attributed to its lower allocation
to stocks; it also previously had a large
overweight in global real estate investment trusts
that dragged on returns, but that was a smaller
detractor. It was able to top the category average
over the same time frame.
Over the past decade, more-aggressive target-date
series have been rewarded as stocks and other
risk assets have generally gone up. But without
knowing that ahead of time, it's not fair to
fault a plan sponsor for selecting a series with a
more conservative approach near retirement.
That's when savings are at the most risk because
participants are about to transition from making
contributions to making withdrawals in retirement.
If plan participants can't stick with a series
during more volatile periods, they won't be able
to benefit from the long-term results. In 2020,
investors closest to retirement were less likely to
stay the course during the first quarter's
bear market than those furthest from retirement.
In 2022, BlackRock's more conservative approach
has benefited shareholders. It and American
Funds were the only series of the six to
lose less than the average category peer through
July ( EXHIBIT 2 ).
Many of the 10 lawsuits call out plan sponsors
for not swapping out BlackRock LifePath Index for
an alternative based on three- and five-year
total-return numbers as of June 2016 and for each
subsequent quarter. The best target-date
teams are regularly making improvements and
enhancements to their series as part of their
processes, though. For example, in 2014,
BlackRock was one of the first firms to increase
the equity allocation early in the glide path.
The glide path change made any performance
comparisons before 2014 less meaningful.
Any investor making decisions based on the old
glide path's returns and not what they expect
going forward from the new glide path wouldn't
be doing a very good job of due diligence.
The changes have benefited younger savers. In
2020, T. Rowe Price changed its Retirement
series' glide path to be more like BlackRock's for
younger investors, showing the merit of such
an approach.
In fact, looking at the past five years, if a plan
sponsor had switched target-date series to one of
the proposed series, younger investors, for the
most part, would have been worse off ( EXHIBIT 3 ).
American Funds' and BlackRock's performance
were toe-to-toe, with BlackRock trailing by
0.03 percentage points. BlackRock's larger equity
allocation further from retirement helped
boost returns.
If the lawsuits are successful, this focus on past
returns versus a hand-picked group of peers
could set a dangerous precedent for plan sponsors.
If plan sponsors have to worry that they will
face a lawsuit for periods when a series isn't a top
performer, it could lead them to performancechasing
and swapping out the target-date funds
more often than they should. Swapping an
underperforming fund for a top-performing fund
has rarely led to good results.
Megan Pacholok is a manager research analyst for
Morningstar Research Services LLC.
Renewing Interest
in Energy
GREATER EUROPE
United Kingdom
Traditional energy stocks have rallied hard as
the wider market has fallen so far in 2022.
The MSCI World Energy Index is up 34.8% for
the year to date through August, while the
Morningstar Global Target Market Exposure Index
is down 17.6% over the same period (in U.S.
dollar terms). The energy index's ebbs and flows
are linked to the price of oil, which hit $130
per barrel shortly after the Russian invasion of
Ukraine. It remains elevated, although it has
declined for the past three months because of
coronavirus-related lockdowns reducing
Chinese demand, a global slowdown that is
bordering on recession, and supply-side
constraints. In the meantime, gas prices in Europe
have surged to record highs as the Continent
looks to wean itself off Russian gas.
Energy stocks stood at 11% of the Morningstar
Global Target Market Exposure Index a
decade ago but were down to under 3% by late
2020. They'd been increasingly ignored by
fund managers, especially as climate discussions
have become more prominent and interest in
alternative energy increased. But recent
dynamics have put them back on the radar
in some quarters.
The most notable energy bull among global
equity managers covered by Morningstar is Rajiv
Jain, who runs GQG Global Equity (which has
a Morningstar Analyst Rating of Silver). His 2%
exposure in March 2021 turned into 12% by
year-end, and then doubled from there by the end
of first-quarter 2022. Jain's thesis rests on
the fact that in addition to supportive commodity
prices, energy companies are also generating
record free cash flow, which is mostly being
returned to shareholders in the form of dividends
and buybacks. Furthermore, there has been
a large fall in capital expenditures, but oil demand
has grown. He thinks production will disappoint
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Morningstar - Q4 2022

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