Moat Stocks Outperformed in Volatile 2022

U.S. equity markets ended 2022 on a down note in December as the typical year-end Santa Rally failed to materialize and stocks could not maintain the positive momentum seen in October and November. December capped off a volatile year as investors dealt with a series of cascading concerns over rising interest rates to curb red-hot inflation, recession fears, Russia’s invasion of Ukraine and a resurgence of COVID-19 in China. These concerns led to a year in which previously high-flying mega-caps and growth tech stocks fell back down to earth and the S&P 500 saw its largest annual decline since the 2008 global financial crisis.

The Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) performed largely in line with the S&P 500 Index during the last month of the year (-5.45% vs. -5.76%, respectively). However, for the full 2022 calendar year, the Moat Index’s focus on attractively priced companies with durable competitive advantages served it well, as the Index outperformed the S&P 500 by over 500 basis points during the year (-13.08% vs. -18.11%, respectively). The outperformance in 2022 is attributable primarily to strong stock selection relative to the S&P 500 Index. Top contributors to performance for the full year were Cheniere Energy Inc. (LNG), Gilead Sciences Inc. (GILD) and Lockheed Martin (LMT).

Moat Index Positioning into 2023

The Moat Index underwent its quarterly review on December 16, 2022. Each quarter it systematically targets the most attractively priced U.S. wide moat companies. The December review resulted in six companies added and removed from the Index. Below are a few takeaways from this review and how the Index is positioned heading into the new year. 

Growth Exposure Ticks Up

In line with the trend over the last few quarterly reviews, the Index’s growth exposure increased again this quarter. This notable trend may be attributed, in part, to the volatile 2022 market that slashed prices in many growth names previously viewed as too expensive for inclusion in the Index. A past blog touching on the Moat Index’s knack for capturing opportunity in volatile markets may be worth a revisit.

Growth and core style exposures in the Moat Index remain underweight relative to the S&P 500 Index, while value is a notable overweight following the December quarterly review.

Source: Morningstar. As of 12/16/2022.

Sector Shifts and Relative Weights

This quarterly review the Index saw slight decreases in exposure to Health Care and Industrials following the removal of biopharmaceutical Gilead Sciences and the industrial conglomerate Honeywell International from the Index due to rich valuations. On the flip side, increased exposures were seen in the Utilities, Materials and Information Technology sectors.

From a relative sector weight perspective vs. the S&P 500, Industrials (+9.3%) and Information Technology (+6.8%) are the two largest sector overweights in the Moat Index following the quarterly review. Consumer Staples (-5.9%) and Energy (-5.0%) sectors exhibit the greatest underweights.

Moat Index Valuations Remain Attractive

As of December 16, 2022, the reconstituted Moat Index exhibited a weighted average Price/Fair Value ratio (P/FV) of 0.72, signaling a 28% discount to Morningstar’s assessment of fair value. This is in contrast to the S&P 500, which featured a weighted average P/FV ratio of 0.89 as of the same date.

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VanEck Morningstar Wide ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

Many of our MOAT clients have expressed interest in applying Morningstar’s moat investing philosophy to smaller market cap companies, which led us to launch the VanEck Morningstar SMID Moat ETF (SMOT). SMOT provides exposure to small- and mid-cap companies with sustainable competitive advantages and attractive valuations.