Making the Most of Last March’s Madness

06 April 2021

Read Time 4 MIN


The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) completed its quarterly review on March 22, 2021. This review was awfully different than its review one year ago, when the Index was rebalancing into the market lows of the pandemic sell-off. As you may recall, the Index added several companies trading at an all-time low discount to their Morningstar-assigned fair value estimate. Companies like Boeing, Bank of America, and US Bancorp were added to the Moat Index for either the first time, or first time in quite a while.

Those moves, in March 2020, began the Index’s repositioning away from growth-oriented firms to more traditional value companies. The trend in March continued through the summer and into the Fall, as the Index maintained a significant overweight to financials and an equally significant underweight to the tech sector, which drove underperformance of the S&P 500® Index in 2020.

While 2020 ended on a sour note with the Moat Index underperforming the S&P 500 Index for the first calendar year since 2015, in retrospect its methodical, rules-based re-positioning set the Index up for success. Investors have shifted focus to cyclical stocks and have favored value stocks, over growth stocks at a rate we have not seen for some time. Through March 26, 2021, the Moat Index has outpaced the S&P 500 Index and both the Russell 1000 Growth Index and Russell 1000 Value Index.

As Tides Have Turned, Moat Index has Rode the Wave

YTD Total Return (%) as of 3/26/2021

As Tides Have Turned, Moat Index has Rode the Wave

Source: Morningstar. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. For fund performance current to the most recent month-end, visit

Much of that success has been driven by companies added to the Index throughout 2020 and several have now been removed or had their position scaled down in order to lock in gains and allow the Index to target other valuation opportunities. Despite these changes, the Index remains tilted toward value stocks moving into the second quarter.

Financials See Major Withdrawals

One big takeaway from this quarter’s Index review was the decline in Financials representation in the Index. The sector was the top overweight relative to the S&P 500 Index for much of 2020, but many of the Index financials companies saw their share price increase closer to or, above fair value, about 7% of the sector’s weight was cut from the Index and financials are now near market weight.

American Express (AXP) was removed from the Index completely and as a result, Bank of America (BAC), Charles Schwab (SCHW) and US Bancorp (USB) saw their weighting in the Index cut in half. All four were trading above their Morningstar fair value estimate as of March 26, 2021.

Tech Pivot: Hardware to Software (and Facebook!)

Tech stocks have been underweight in the Moat Index for many quarters and following the March review, it remains so. Several tech stocks were removed this month, primarily from the strong performing semiconductor industry, but the sector weighting remains approximately the same due to several additions. Alphabet (GOOGL), ServiceNow, Inc. (NOW), Tyler Technologies (TYL), and Adobe (ADBE) were all added to the Index in March.

Facebook (FB), a tech company classified in the communication services sector, was also added to the Moat Index in March. It has a notable past as it relates to coming in and out of the Index over the years. It was last removed from the Index in September 2020 and has left its mark each time it has been included.

The social networking company began trading at a discount to Morningstar’s fair value estimate shortly after being removed from the Index in September 2020, owing mostly to Morningstar’s increase in fair value estimate from $265 to $306 per share. Morningstar raised Facebook’s fair value estimate once in late January to $335 making its stock price too attractive relative to fair value for the Index to pass up this past review.

Final Results: Nine In, Nine Out

All told, the Moat Index had nine stocks removed from its sub-portfolio under review and nine added. All adds and cuts were driven by the Index’s price/fair value screen. No economic moat rating changes impacted the Index this quarter.

Index Additions & Increased Allocations
Company Ticker Price/Fair Value
Alphabet Inc A GOOGL 0.78
Facebook Inc A FB 0.79
Cerner Corp CERN 0.82
ServiceNow, Inc. NOW 0.85
Tyler Technologies Inc TYL 0.85
Roper Technologies Inc ROP 0.86
Adobe Inc ADBE 0.88
Northrop Grumman Corp NOC 0.90
Dominion Energy Inc D 0.90

Index Deletions & Decreased Allocations
  Failed Screen
Company Ticker Moat Rating Price/Fair Value Other
US Bancorp USB   x  
Microchip Tech MCHP   x  
Lam Research Corp LRCX   x  
Applied Materials Inc AMAT   x  
Polaris Inc PII   x  
Bank of America Corp BAC   x  
John Wiley & Sons Inc. A JW.A   x  
Charles Schwab Corp SCHW   x  
American Express Co AXP   x  

Source: Morningstar. Price/fair value data as of March 9, 2021. Past performance is no guarantee of future results. For illustrative purposes only.

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