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Morningstar Moat Investing Philosophy: Combining Quality and Valuation


Economic Moat Rating

DAN LEFKOVITZ: The concept of an “economic moat” originated with a Warren Buffett interview. He said that he likes to buy companies that have moats around their businesses. Just like a medieval castle that had trenches filled with water to keep enemies at bay, a company can have a sustainable competitive advantage that protects its profits from competition. We have identified five different sources of economic moats: intangible assets, switching costs, network effect, cost advantage, and efficient scale. We have taken the metaphor coined by Buffett and turned it into a robust equity research methodology. Every company that our equity analysts assess gets one of three economic moat ratings: wide, narrow, or none.


Fair Value Estimate


LEFKOVITZ: The other pillar of our equity research methodology is valuation. It's all well and good to buy a company with a strong competitive position, but if you're overpaying for it, it's not going to be a good investment. So we issue fair value estimates, which are essentially Morningstar analysts' estimate of what a company is truly worth. Over the long term, we expect a company’s share price and its fair value estimate to converge. But over the short term, there can be big dislocations between these prices. Obviously, we prefer to buy wide moat stocks when they are trading at substantial discounts to their fair value estimates.


Indexing Strategy


LEFKOVITZ: Morningstar Indexes’ mission is to take the research intellectual property coming out of Morningstar's equity analyst team and translate it into an investable index strategy. Variables like the number of constituents, the weighting scheme, the rebalancing and reconstitution methodology, the sector and region capping, are all the responsibility of our Indexes Team to optimize. We have a robust modelling engine that comes up with optimal schemes for each of our indexes.


Morningstar’s Moat Index Series: U.S. and International


LEFKOVITZ: The Morningstar moat focus index series is meant to highlight the very best ideas of Morningstar equity analysts in a high-conviction, focused portfolio strategy. Our moat focus index series picks up on two signals: valuation and quality, as assessed through the economic moat rating. Our U.S. wide moat focus index picks the cheapest U.S. stocks with wide moat ratings, and our global ex-US moat focus index picks among the stocks with moat ratings that are trading at the deepest discount to fair value.


[The U.S. index is the Morningstar® Wide Moat Focus IndexSM, MWMFTR, and the international index is the Morningstar® Global ex-US Moat Focus IndexSM , MGEUMFUN.]


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IMPORTANT DISCLOSURE

The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about VanEck Funds, VanEck Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com.


Please note that Van Eck Securities Corporation offers investment products that may invest in the asset class(es) included in this presentation.


An investment in the VanEck Vectors Morningstar International Moat ETF may be subject to risks which include, among others, fluctuations in value due to market and economic conditions or factors relating to specific issuers. Foreign and emerging markets investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, changes in currency exchange rates, unstable governments, and limited trading capacity which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.


Investment in the VanEck Vectors Morningstar Wide Moat ETF may be subject to risks which include, among others, fluctuations in value due to market and economic conditions or factors relating to specific issuers. Medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors. Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com/etf. Please read the prospectus and summary prospectus carefully before investing.


Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses. Index returns assume that dividends have been reinvested.


No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © Van Eck Securities Corporation.


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