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Stock Selection: For Better or Worse

19 June 2019

 

For the Month Ending May 31, 2019

The Morningstar® Wide Moat Focus IndexSM (“U.S. Moat Index”) trailed the broad U.S. equity markets as represented by the S&P 500 Index in May (-7.97% vs. -6.35%, respectively). Although historically a benefit to the Index, stock selection was the primary driver of the negative return differential between the U.S. Moat Index and the S&P 500 for the month.

Jones Lang LaSalle, Inc. (JLL) was the most troublesome individual overweight in the U.S. Moat Index. JLL posted a -19.23% return in May and also saw its moat rating downgraded from wide to narrow on May 21, 2019. Morningstar cited the cyclical nature of the real estate services industry, which is also in the process of rapid consolidation. Concerns that JLL and CBRE, the other major player in the industry, will compete more directly as a result of this consolidation was the primary driver of the downgrade. Morningstar continues to believe JLL boasts a strong reputation and benefits from switching costs, one of the five sources of moat identified by Morningstar, but their conviction on the sustainability of the company’s competitive advantage now stands at 10 years rather than 20 years.

The U.S. Moat Index was also a victim of the fallout from trade negotiations between the U.S. and China. Its overweight exposure to semiconductor companies Microchip Technologies (MCHP) and KLA-Tencor Corp. (KLAC) contributed to underperformance. Morningstar views MCHP as one of the best-run companies in the industry, and fair value estimate increases in November 2017 and March 2018 allowed the company to enter the Index. KLAC has positioned itself as the dominant player in the process diagnostic and control segment of the semiconductor industry. Its tools and technical expertise enable chipmakers to inspect and identify defects in the chip production process. Morningstar analysts recently reaffirmed their fair value estimates for U.S.- and European-based chipmakers despite much of the headline-grabbing news emanating from the U.S. and China.

Not all news was bleak for the U.S. Moat Index in May. Several health care companies (AmerisourceBergen, Medtronic, McKesson and Pfizer) and consumer discretionary companies (The Hershey Co., McDonald’s and Mondelez International) provided a welcomed boost to relative performance.

The U.S. Moat Index will undergo its next quarterly review in late June, at which point the eligible U.S. stock universe will be reassessed based on moat ratings and valuations. This will allow the Index to target the companies that Morningstar believes to be underappreciated and possess strong, sustainable competitive advantages.

Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

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, VanEck Switzerland AG, VanEck Securities UK Limited and their 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 is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
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Morningstar® US Sustainability Moat Focus Index is a trade mark of Morningstar Inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Sustainable Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in VanEck Morningstar US Sustainable Wide Moat UCITS ETF.
Effective December 17, 2021 the Morningstar® Wide Moat Focus IndexTM has been replaced with the Morningstar® US Sustainability Moat Focus Index.
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.
It is not possible to invest directly in an index.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

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