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The Morningstar® Wide Moat Focus IndexTM (“Moat Index”) is ahead of the S&P 500 Index by more than two percent for the current month through September 20, 2019 (4.52% vs. 2.36%, respectively). This follows a difficult August in which the Moat Index trailed the S&P 500® Index by nearly one percent on a total return basis (-2.30% vs. -1.58%, respectively).
Much of August’s struggles were driven by the financials sector. In particular, brokerage firm Charles Schwab Corp. (SCHW) and custody bank State Street Corp. (STT) were among the Moat Index’s five worst performing stocks for the month. One of its few energy sector holdings, Core Laboratories (CLB), had a particularly poor August despite featuring one of the largest economic moats in Morningstar’s oil field services coverage universe. CLB’s stock price has since reversed course and has helped elevate the Moat Index, leading all constituents from a total return perspective in September thus far.
This surge led into the index’s standard quarterly review. During the review, the eligible universe of U.S. stocks is assessed to allow for the Moat Index to represent wide moat companies with attractive valuations. Companies that have appreciated to near or above fair value may be replaced with companies that are more attractively priced. Alternatively, companies that have not realized their fair value may remain in the Moat Index or see their weighting increased to allow the market more time to realize the potential mispricing inherent in those companies’ prices.
Following the quarterly review, the Moat Index did not change its sector exposure significantly. Its health care weighting increased slightly, remaining the largest overweight relative to the S&P 500 Index, while information technology companies remain slightly underweight. However, there was a good deal of activity this quarter. Four companies that were partially removed from the Moat Index in June 2019 following a previous downgrade to their economic moat rating were fully removed this quarter. One additional constituent, General Mills (GIS) was removed from the Moat Index after the Morningstar equity research team downgraded its economic moat from wide to narrow in July, citing secular headwinds related to evolving consumer nutritional preferences.
Nine companies were removed because they were trading too close to fair value relative to other eligible wide moat companies. Several companies were added that are either new to the Moat Index or have not been seen in the index in quite some time, such as Domino Pizza Inc. (DPZ) and Altria Group Inc. (MO).
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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.
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