Moat Stocks Show Resilience Amid Recent Volatility

The Morningstar Wide Moat Focus Index’s style exposure and stock selection were key to its resilience through January’s market turmoil.

The Morningstar^® Wide Moat Focus Index^SM (the “Moat Index” or “Index”) began 2022 with a notable display of the resiliency it has historically exhibited through periods of market turmoil. The Index finished January well ahead of the S&P 500 Index, with defensive characteristics on display. The Moat Index posted a loss of -2.27% for the month, almost half of the S&P 500’s loss of -5.17%. Some of the Index’s outperformance can be attributed to its style exposure, notably its underweight to growth and overweight to value. However, stock selection proved beneficial in January, particularly from several companies that contributed to the Moat Index’s 2021 underperformance.

January Moat Index Standouts

Wells Fargo & Co. (WFC)

The Moat Index is currently underweight financials, which detracted from relative performance as financials performed well compared to other sectors in January. Its stock selection within the financials sectors offset the effects of its underweight. Wells Fargo was one standout in the Index, as it outpaced financials and the banking industry broadly speaking.

The bank reported solid fourth quarter results well ahead of consensus expectations, driven in large part by higher-than-expected net interest income and fee income. Morningstar notes that Wells Fargo remains in the middle of a multiyear rebuild with years of expense savings-related projects ahead of it, but that it has seen glimpses of the bank’s transition to offense from defense.

Morningstar raised Wells Fargo’s fair value estimate to $62 per share from $55 on January 18 to account for flat statutory tax rate expectations and three anticipated interest rate hikes in 2022.

Cheniere Energy Inc. (LNG)

Natural resources companies have generally benefited both from the reopening of the global economy over the last year and rising commodity prices. Materials and energy exposure are typically light in the Moat Index due to a general lack of wide moat rated companies from the sector. Cheniere Energy has been one of the few index constituents from either sector in recent years and has contributed positively as of late.

According to Morningstar, Cheniere benefits from the moat source derived primarily from the 20-year take-or-pay contracts that it has signed with multiple customers to liquefy natural gas. This has put Cheniere in an incredibly strong competitive position as a pure toll-taker with no commodity price risk.

Morningstar believes Cheniere is well-positioned to be the exporter of the incremental liquefied natural gas supplied to the global market over the next few years, particularly as demand ramps up from China. However, they must also address regulatory reforms in Europe that will scrutinize the environmental impacts of U.S. liquefied natural gas producers to avoid losing exposure to the continent, which is a major source of liquefied natural gas demand.

History of Moat Index’s Defensive Characteristics

By nature of investing in companies with competitive advantages that are also attractively priced, the Moat Index has historically offered attractive risk and return characteristics through market downturns. From its live inception in February 2007, the Index has provided attractive relative returns paired with impressive drawdown performance.

Index Risk Statistics

2/2007 – 12/2021

Source: Morningstar.com Calculated using quarterly returns.

Index performance is not illustrative of Fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333. Past performance is no guarantee of future results. Indexes are unmanaged and are not securities in which an investment can be made. Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date.

Note on a Moat Stock: Meta Platforms

Meta Platforms (the company formerly known as Facebook) reported quarterly results after the close of markets on February 2, sending shares into a free fall the following day. According to Morningstar, revenue was slightly ahead of expectations, but the firm missed on the bottom line due to higher investments in not only the Reality Labs metaverse segment but also in Reels and in overall improvement of its advertising back-end. Its first quarter 2022 revenue guidance was also below consensus estimates.

Morningstar reduced its fair value estimate for Meta slightly from $404 per share to $400, but stated that they don’t think the market’s reaction is warranted and believe wide-moat Meta’s shares now present an attractive investment opportunity.