• Moat Investing

    Fair Value, Rinse, Repeat: A Key to Moat Investing

    Brandon Rakszawski, Senior ETF Product Manager

    For the Month Ending January 31, 2019

    The Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") started the year strong, posting a return of 9.45% in January, which represents a notable outperformance of the broad markets as represented by the S&P 500 Index (8.01%) and Morningstar US Large Cap Index (7.59%).

    Target Attractive Valuations and Repeat

    A key to the U.S. Moat Index’s success is getting valuations right. Morningstar’s equity research team adopts a forward-looking approach that includes forecasting a company’s future free cash flows to determine its current fair value estimate. The index’s methodology is designed to allocate to moat companies that appear most attractively priced at each quarterly index review. The assumption is that the market will realize the intrinsic value of these companies and bring their market price more in line with Morningstar’s view of fair value.

    Several companies in the index proved that assumption correct in January. Facebook (FB) was added to the index in September and December of 2018. The stock began to appear attractively priced after a July sell-off that was triggered by earnings estimate revisions and ongoing privacy concerns with the social network. By the end of January, FB was the top contributor to the U.S. Moat Index’s performance for the month, after beating fourth-quarter consensus estimates.

    Facebook: 1 Year Price and Fair Value as of 1/31/2019

    U.S. Moat Stock: Facebook

    Source: Morningstar. Past performance is no guarantee of future results. For illustrative purposes only. Not a recommendation to buy or sell any security. Visit vaneck.com to view daily ETF and index holdings.

    Compass Minerals (CMP) was also among January’s top performers following a difficult fourth quarter. Morningstar analysts have lowered its fair value estimate for CMP several times over the past three years but recently held steady at $81 per share. CMP finished the month trading around $52 per share, representing significant upside potential according to Morningstar’s valuation research.

    Only five of the U.S. Moat Index’s 49 constituents posted negative returns for the month. The top detractors from performance were two healthcare companies: Medtronic PLC (MDT) and Bristol-Myers Squibb Company (BMY). BMY sold off at the beginning of January after announcing the acquisition of Celgene. It recovered slowly throughout the month and finished January with a roughly 4% loss in share price. Morningstar analysts believe the acquisition creates value and expands BMY’s pipeline.

    Moat Index’s Stock Selection Battles Back

    The U.S. Moat Index’s outperformance of the Morningstar US Large Cap Index in 2018 (-0.74% vs. -3.44%, respectively) was driven exclusively by beneficial sector over- and underweights (i.e., allocation effect1). In fact, stock selection (i.e., selection effect2) was detrimental to relative returns in 2018.

    January saw a complete reversal of this. The outperformance posted by the U.S. Moat Index was driven by strong stock selection which is more in line with the index’s historical driver of outperformance.


    1Allocation effect is the portion of portfolio excess return attributed to taking different group bets from the benchmark. (If either the portfolio or the benchmark has no position in a given group, allocation effect is the lone effect.) A group’s allocation effect equals the weight of the portfolio’s group minus the weight of the benchmark’s group times the total return of the benchmark group minus the total return of the benchmark in aggregate.

    2Selection effect is the portion of portfolio excess return attributable to choosing different securities within groups from the benchmark. A group’s selection effect equals the weight of the benchmark’s group multiplied by the total return of the portfolio’s group minus the total return of the benchmark’s group.

  • Important Disclosure

    For informational and advertising purposes only.

    This information originates from VanEck (Europe) GmbH which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin). The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.

    VanEck Morningstar US Wide Moat UCITS ETF (the “Fund”) is a sub-fund of VanEck® UCITS ETFs plc., organised under the laws of Ireland, managed by VanEck Investments Ltd. VanEck Investments Ltd delegated the investment management of the Fund to Van Eck Associates Corporation, an investment manager regulated by the U.S. Securities and Exchange commission (SEC). Any investment decision must be made on the basis of the prospectus and the key investor information document (“KIID”), which is available at www.vaneck.com. These are available in English and certain other languages at www.vaneck.com or can be requested free of charge from VanEck Investments Ltd or from the relevant local information agent details of whom to be found on www.vaneck.com. The Fund is registered with the Central Bank of Ireland and tracks an equity index.

    Morningstar® Wide Moat Focus IndexTM is a trade mark of Morningstar inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability of investing in VanEck Morningstar US Wide Moat UCITS ETF.

    The S&P 500 Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

    S&P 500® Index: consists of 500 widely held common stocks covering the leading industries of the U.S. economy. Morningstar® Wide Moat Focus IndexTM consists of at least 40 U.S. companies identified as having sustainable, competitive advantages, and whose stocks are the most attractively priced, according to Morningstar.

    All performance information is historical and is no guarantee of future results. Investing is subject to risk, including the possible loss of principal. You must read the Prospectus and KIID before investing.

    No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

    © VanEck (Europe) GmbH


  • Authored by

    Brandon Rakszawski
    Senior ETF Product Manager

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