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Moat-ivated investing

Arian Neiron  |  05 Dec 2016Text size  Decrease  Increase  |  

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As significant geopolitical and economic events will continue to contribute to ongoing US market volatility, investors need to consider those companies with strong competitive advantages.


Since the outcome of the US election, equity markets have rebounded surprisingly quickly from an initial fall.

While the bond market has been hit hard by the prospect of rising rates and higher US inflation, US stocks have performed well on the back of Trump's anticipated domestic spending plans.

Trump's proposed plans to invest heavily in infrastructure and reduce corporate taxes could amount to substantial fiscal stimulus, which is boding well for US equities at present.

This, along with higher inflation, could see the US dollar appreciate and the Australian dollar fall as a result.

An uplift in US earnings in the third quarter and positive sales growth also means the current environment bodes well for US equity markets.

Positive outlook for US equities

While the current outlook is positive for US equities, this view must be seen as short term. Market fluctuations in response to uncertainty around Trump's foreign and domestic policies continue to be a regular occurrence.

Other significant geopolitical and economic events this year continue to contribute to ongoing market volatility. So, it is important for investors to consider those US companies with strong competitive advantages which can sustain market volatility.

Prior to the election results, 85 per cent of companies within the S&P 500 Index had reported their annual earnings. According to FactSet, 54 per cent reported sales above the mean estimate and 71 per cent of those reported earnings above the mean estimate.

For the first time in two years there is growth in earnings per share (EPS) and upside in sales per share, which reinforces a trend of positive growth.


Growth in training 12 month EPS at quarter end 2013 to 2016


Source: Bloomberg. Past performance is not a reliable indicator of future performance.



Growth in trailing 12 month sales per share at quarter end 2013 to 2016


Source: Bloomberg. Past performance is not a reliable indicator of future performance.


Wide-moat companies

To help identify companies with competitive advantages, Morningstar developed the Economic Moat Rating.

Wide-moat companies possess structural competitive advantages that are expected to allow them to earn above-average returns on capital over a sustained period of 20-plus years, and which conversely prevent those returns from quickly eroding.

Only 243 companies worldwide have a wide moat rating, indicating these companies can sustain their excess returns for the long term.

In Australia, there are only seven companies classified as having a wide moat. In the US, just 143 have the classification.

Morningstar's equity analysts also assign a fair value to each company in its coverage universe. Using a combination of the qualitative moat data and the quantitative fair value data, Morningstar has constructed its Moat Index Series.

The Morningstar Wide Moat Focus Index (MOAT Index) includes at least 40 US wide-moat companies with the most compelling valuations.

The index is rules based, equally weighted and reviewed on a quarterly basis. To view the current holdings click here.

MOAT performance

For the calendar year to date, Morningstar's MOAT Index has outperformed the S&P 500 Index by over 11.97 per cent (20.13 per cent versus 8.16 per cent). On a trailing basis, the MOAT Index has outperformed the market over most periods.


Trailing returns to 25 November 2016


Source: FactSet, as at 25 November 2016. Performance is in A$. Results are calculated to the last business day of the month and assume immediate reinvestment of all dividends and exclude costs associated with investing in MOAT. You cannot invest directly in an index. Past performance is not a reliable indicator of future performance of the indices or MOAT.


Importantly, Morningstar's MOAT Index also demonstrates outperformance in periods when markets fall, as demonstrated in the graph below during the global financial crisis and euro sovereign debt crisis.


Cumulative Index Returns (per cent) 30 September 2002 to 31 October 2016


Source: Morningstar, VanEck. Data as at 31 October 2016 in Australian dollars. Past performance of the indices is not a reliable indicator of future performance of the indices or MOAT fund. An index is unmanaged and cannot be invested in directly. Index returns assume that dividends have been immediately reinvested and do not reflect the fund's management costs and any fees or expenses incurred when trading on exchange. 2007-2008 returns calculated for 1 January 2007 to 31 December 2008 and 2009 returns calculated for 1 January 2009 to 31 December 2009.


Investors can access US equity wide-moat companies on ASX

Innovation in the ETF industry means Australian investors can now access US equity wide-moat companies by investing in the VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT), which tracks the Morningstar Wide Moat Focus Index.

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Arian Neiron is the managing director of VanEck Australia. VanEck is a leading global provider of exchange-traded funds (ETFs). This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

© 2016 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.