Bloated Index Returns No Match for MOAT

Strong 2023 Results Enhanced Long-Term Outperformance

For equity markets, 2023 was the year of the “Magnificent 7.” As of December 31, 2023, these 7 mega-cap stocks accounted for 22.52% of the broad-based Morningstar US Market Index. And in 2023, they were responsible for more than 50% of the index’s total calendar year return.

Source: Morningstar, as of December 2023. Data Time Period: 1/1/2023 to 12/31/2023. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.

However, these 7 mega-cap stocks only represent an 8.95% weighting in the Morningstar Wide Moat Focus Index (as of December 31, 2023). Yet, despite the performance headwind of nearly 2% from this 13.57% underweight to the Magnificent 7, the Morningstar Wide Moat Focus Index (the Moat Index) posted strong absolute returns in 2023 and handily outperformed the Morningstar US Market Index by 5.97% in 2023.

The Moat Index employs an equally-weighted index methodology which makes it’s 2023 success even more impressive. In a year dominated by mega cap stocks, equal-weighted indexes generally lagged their market capitalization-weighted equivalent. Despite this second headwind, the Moat Index’s process shined.

Source: Morningstar, December 2023. Data Time Period: 2/14/2007 – 12/31/2023. Index performance is not illustrative of fund performance. It is not possible to invest directly in an index.

Longer term, the Moat Index’s focus on identifying companies with wide economic moat ratings has paid off. The Morningstar Wide Moat Focus Index has now outperformed the Morningstar US Market Indexover six of the last eight years. Equally as impressive, the Moat Index has outperformed the Morningstar US Market Index in 66% of the 12-month rolling periods since it’s 2007 inception.

The Morningstar equity research team recently conducted a detailed analysis of the Wide Moat Focus Index’s 2023 performance and positioning. In addition to the performance breakdown outlined above, highlights of this analysis include:

• Attribution analysis: Both sector positioning and stock selection proved favorable in 2023.
• Valuation analysis: Despite recent outperformance, the index continues to offer an attractive discount to fair value.
• Sector positioning: Sector weightings drifted toward a more defensive posture in 2023.
• Style & market cap analysis: The index migrated toward a value style bias and smaller on the market cap spectrum.
• Holdings highlights: Meta Platforms, Salesforce and MarketAxess stood out as strong performers in 2023.