• Moat Investing

    Moat Strategy Continues to Reward Investors with Exposure to Economic “Moats”

    Dominik Poiger ,CFA, Portfolio Manager
    19 December 2018
     

    Nearly twenty years ago in an interview with Forbes, Warren Buffet famously observed that “the products and services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

    Economic “moats” – the sustainable competitive advantages that allow businesses to protect their long-term profits and market share from competitors – have seen increasing interest over the years as investors have sought out sustainable outperformance, growth, and returns. Warren Buffet’s famous observation would soon prove prescient. When the dot-com bubble burst soon after in 2000, tech stocks were decimated while “wider-moat” sectors such as health care, utilities, and consumer staples proved much more resilient.

    Today, economic moats continue to demonstrate their value to investors. To satisfy investor demand in Europe for this important category of companies, VanEck launched the VanEck Vectors Morningstar US Wide Moat UCITS ETF (ticker: MOAT) in October 2015, which tracks the Morningstar® Wide Moat Focus IndexTM (MWMFTR), and is focused on providing exposure to attractively-priced U.S. companies with sustainable competitive advantages.

    Some of the most important defining features of companies with wide economic moats include strong brands with high customer loyalty; industries defined by high switching costs that tend to lock customers into existing payment structures; network effects (think of Facebook or Instagram) which encourage customers to continue using their existing provider; cost advantages that enable companies to lower costs beyond what their competitors are capable of (for example access to cheap raw materials), and efficiencies of scale (which can make it prohibitively expensive for new competitors to enter the market).

    MOAT’s index, MWMFTR, has a proven track record of generating significant excess returns relative to the overall market*. While the S&P 500 index has generated a total return of 152 % since March 1st 2007, MOAT’s index has generated a return of 274 %, more than 120 percentage points beyond that of the S&P 500 (as of November 30th, 2018).This large outperformance is due in part to the difference in sector weights that result from its unique, moat-focused methodology. For example, at the end of October, MWMFTR was overweight in the healthcare and consumer staples sectors by 16% and 12% respectively, and underweight information technology by nearly 7%, when compared to the S&P 500.

    These unique sector weights have also contributed to the resilience the index has demonstrated during periods when other indices have suffered. In October 2018, MWMFTR was stronger relative to U.S. large cap stocks as represented by the Morningstar US Large Cap Index. The October sell-off across U.S. stocks, which was particularly pronounced in the technology sector, wiped out a significant portion of U.S. stock market gains for 2018; consumer staples and utilities (sectors often defined by wide economic moats) were the only U.S. large cap sectors to post positive returns over the same period. For these reasons and others, the U.S. moat index finished ahead of U.S. large cap stocks not just for October, but year-to-date up to that point, in spite of being underweight in information technology, which has driven a great deal of stock market gains in 2018.

    It’s clear that companies with wide economic moats tend to enjoy a significant resilience advantage during periods of market stress. Moreover, over the long term, companies with wide economic moats have delivered excess returns compared to the broad market, as measured by MWMFTR, the MOAT ETF’s index. Over the decades following Warren Buffet’s prophetic observation regarding economic moats, his wisdom has been borne out time and time again. By taking a closer look at the MOAT ETF and heeding Warren Buffet’s approach, investors may profit just as handsomely as companies with wide economic moats.