Moat investing is based on a simple concept: Invest in companies with sustainable competitive advantages trading at attractive valuations.
The VanEck Approach
Over 100 Morningstar equity analysts use a rigorous proprietary process to determine if a company has an economic moat, or sustainable competitive advantage, which may allow them to earn above average returns on capital over a long period of time. Companies included in the Index are also determined to be trading at attractive prices relative to Morningstar’s estimate of fair value.
- The Wide Moat Strategy tracks the Morningstar® Wide Moat Focus IndexSM and contains at least 40 attractively priced U.S. companies with sustainable competitive advantages.
- Morningstar’s fair value research allows the Moat Index to target companies trading at attractive prices at each quarterly review in an effort to avoid overpaying for moat-rated companies.
- Morningstar has identified five primary sources of economic moats: switching costs, intangible assets, network effect, cost advantage and efficient scale.
- Applying Morningstar’s moat investing philosophy to U.S. companies has historically generated excess returns relative to the broad U.S. equity market.
- Morningstar® Wide Moat Focus IndexSM has displayed strength through many periods of uncertainty. It performed relatively well in 2008 and the fourth quarter of 2018, compared to the broad U.S. equity market.
- Attractive valuations in both absolute and relative terms. Valuations are far more attractive than the broad market, signaling greater upside potential if the market recognizes the mispricing of the portfolio stocks based on Morningstar’s fair value assessments.
A company’s moat refers to its ability to maintain the competitive advantages that are expected to help it fend off competition and maintain profitability into the future. Morningstar’s moat investing philosophy provides investors with access to its forward-looking equity research, which seeks to identify economic moats and assess each company’s fair value.
This philosophy was made available in 2012 to investors with the launch of a U.S. focused strategy, but has since been applied to international and global stocks.