• Moat Investing

    Forward-Looking Valuations Unlock the Power of Moat Investing

    Brandon Rakszawski, Senior ETF Product Manager
    October 22, 2018
     

    For the Month Ending September 30, 2018

    Performance Overview

    Domestic moat companies, as represented by the Morningstar® Wide Moat Focus IndexSM ( MWMFTR, or "U.S. Moat Index"), shined in September, outperforming the S&P 500® Index (1.25% vs. 0.57%, respectively). The Morningstar® Global ex-US Moat Focus IndexSM ( MGEUMFUN, or "International Moat Index") trailed the MSCI All Country World Index ex-USA in September (0.25% vs. 0.46%, respectively), but remained ahead since the beginning of the year (-2.49% vs. -3.09%, respectively).

    Index Review Highlights Importance of Valuations

    The U.S. and International Moat Indices underwent their quarterly review in September, and both saw additions and deletions (see Index Reconstitution below). Valuation opportunities have historically been the primary driver of turnover as stock prices move above and below Morningstar’s estimate of fair value.

    What sets Morningstar’s valuation methodology apart is its forward-looking nature. While many valuation metrics, like traditional price-to-earnings and price-to-book multiples, rely mostly on backward-looking data, rigorous company analysis from Morningstar’s equity research analysts supports their future cash flow estimates. Their analysts then take these projections into account when determining a current fair value for a company. In other words, Morningstar’s assessment of what a company is worth today encompasses tomorrow’s potential.

    Following the September index review, the U.S. Moat Index remained overweight health care stocks. Rather than being an indication of Morningstar’s view of the sector as a whole, this reflects wide moat opportunities within the health care sector. The health care sector as a whole, as represented by the Morningstar US Healthcare Index, has fluctuated above and below fair value over the last five years, ending the period above fair value. However, looking at the individual stock level, several companies appear undervalued based on Morningstar’s valuation research. For example, current U.S. Moat Index constituent and health care sector stock Medtronic has traded below Morningstar’s fair value estimate since early 2017.

    Health Care Sector Valuations
    5 Years as of 9/30/2018

    Chart of Health Care Sector Valuations

     

    Morningstar View Medtronic as One Health Care Stock Undervalued
    5 Years as of 9/30/2018

    Chart of Health Care Sector Valuations

     

    Morningstar’s moat investing philosophy is all about investing in companies with sustainable competitive advantages and doing so at attractive prices relative to their fair value. This results in dynamic U.S. and international portfolios that repeatedly assess moat companies to identify mispricing in the market.

     

    (%) Month Ending 9/30/18

    Domestic Equity Markets

    International Equity Markets

    (%) As of 9/30/18

    Domestic Equity Markets

    International Equity Markets

    (%) Month Ending 9/30/18

    Morningstar
    Wide Moat Focus Index (MWMFTR)

    Top 5 Index Performers
    Constituent Total Return
    L Brands Inc 14.64
    Express Scripts Holding Co 7.94
    Compass Minerals International Inc 7.43
    Zimmer Biomet Holdings Inc 6.54
    Starbucks Corp 6.34

    Bottom 5 Index Performers
    Constituent Total Return
    General Electric Co -11.93
    Wells Fargo & Co -10.12
    Microchip Technology Inc -8.28
    Campbell Soup Co -7.15
    General Mills Inc -6.72

    View MOAT's current constituents
    View MWMZX's current constituents

    Morningstar
    Global ex-US Moat Focus Index (MGEUMFUN)

    Top 5 Index Performers
    Constituent Total Return
    Beijing Enterprises Holdings Ltd 17.93
    Beijing Capital International Airport Co
    Ltd H
    15.68
    SCOR SE 14.38
    Denso Corp 10.58
    Cameco Corp 9.58

    Bottom 5 Index Performers
    Constituent Total Return
    ANTA Sports Products Ltd -11.89
    Murata Manufacturing Co Ltd -10.45
    China Resources Gas Group Ltd -10.28
    KION GROUP AG -10.15
    Yum China Holdings Inc -9.23

    View MOTI's current constituents

    As of 9/21/18

    Morningstar
    Wide Moat Focus Index (MWMFTR)

    Index Additions
    Added Constituent Ticker
    Intel Corp INTC US
    Philip Morris International PM US
    BlackRock Inc BLK US
    Applied Materials Inc AMAT US
    KLA-Tencor Corporation KLAC US
    Gilead Sciences Inc GILD US
    State Street Corp STT US
    John Wiley & Sons Inc. A JW.A US
    Jones Lang Lasalle Inc JLL US
    T Rowe Price Group Inc TROW US
    General Dynamics GD US
    Facebook Inc A FB US
    ServiceNow Inc. NOW US

    Index Deletions
    Deleted Constituent Ticker
    Cheniere Energy Inc LNG US
    Lilly Eli & Co LLY US
    Express Scripts Holding Co. ESRX US
    Merck & Co Inc MRK US
    Amgen Inc AMGN US
    CVS Health Corporation CVS US
    Franklin Resources Inc BEN US
    General Electric Co GE US
    Stericycle Inc SRCL US
    L Brands Inc LB US
    Lowe's Cos Inc LOW US
    Twenty-First Century Fox Inc A FOXA US

    View Latest MOAT Reconstitution Report
    View MOAT's list of current constituents

    Morningstar
    Global ex-US Moat Focus Index (MGEUMFUN)

    Index Additions
    Added Constituent Country
    Tencent Holdings Ltd. China
    MGM China Holdings Ltd Hong Kong
    Cameco Corp Canada
    Credit Suisse Group AG Switzerland
    ANTA Sports Products Ltd. China
    Imperial Brands Plc United Kingdom
    Roche Hldgs AG Ptg Genus Switzerland
    Yum China Holdings Inc China
    Murata Manufacturing Co Ltd Japan
    China Shenhua Energy Co Ltd H Shares China
    UBS Group AG Switzerland
    Agricultural Bank of China Ltd H Shares China
    China Mobile Ltd. China
    Sands China Ltd. Hong Kong
    Royal Dutch Shell PLC United Kingdom
    Denso Co Japan
    Kingfisher United Kingdom
    WPP Plc United Kingdom
    Sociedad Quimica y Minera de Chile SA B Chile
    China Construction Bank Corp H Shares China
    Sodexo France
    Anhui Conch Cement Co Ltd H Shares China
    KDDI Corp Japan
    Samsung Electronics Co South Korea
    Overseas-Chinese Banking Singapore
    Yaskawa Electric Corp Japan
    BP United Kingdom
    Calbee Inc Japan

    Index Deletions
    Deleted Constituent Country
    Banco Bilbao Vizcaya Argentaria SA Spain
    Naturgy Energy Group SA Spain
    Bank of China Ltd H Shares China
    Beijing Capital International Airport Co. Ltd. China
    Beijing Enterprises Holdings Ltd. China
    China Resources Gas Group Ltd. China
    Nordea AB Sweden
    Svenska Handelsbanken A Sweden
    Bayer AG Germany
    GEA AG Germany
    KION Group AG Germany
    Symrise AG Germany
    HeidelbergCement AG Germany
    Koninklijke Philips Electronics NV (Royal Philips Electronics) Netherlands
    Koninklijke KPN NV Netherlands
    Kubota Corp Japan
    Hoshizaki Electric Co Ltd Japan
    SoftBank Group Corp* Japan
    Kao Corp Japan
    Uni Charm Corp Japan
    Brambles Industries Ltd Australia
    Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. Mexico
    SK Telecom Co Ltd South Korea
    Vodafone Group United Kingdom
    Unilever United Kingdom
    Telecom Italia SpA Italy
    LafargeHolcim Ltd Switzerland
    CK Asset Holdings Ltd Hong Kong

    View Latest MOTI Reconstitution Report
    View MOTI's list of current constituents