Written by: Brandon Rakszawski
The Morningstar ® Wide Moat Focus Index SM
("U.S. Moat Index") finished the month of April ahead of the broad U.S. equity markets as represented by the S&P 500 Index (4.65% vs. 4.05%, respectively). This followed a disappointing March in which the U.S. Moat Index lagged the S&P 500 Index by nearly 2%, due in large part to its exposure to biotech company Biogen Inc. (BIIB), whose share price dropped after announcing the discontinuation of its aducanumab Alzheimer drug trials.Strong performance from information technology and communication services companies fueled the April rebound, placing the U.S. Moat Index ahead of the S&P 500 Index on a year-to-date basis (18.69% vs. 18.25%, respectively) at month’s end. The Walt Disney Co. (DIS), Microchip Technology, Inc. (MCHP), and Facebook Inc. (FB) were among the top U.S. Moat Index performers in April. In fact, 37 of the 46 index constituents finished the month in the black while the majority of the negative performing constituents were from the struggling health care sector.
Facebook: Friending and UnfriendingFacebook offers a fascinating case study of the efficacy of allocating to wide moat companies at attractive valuations. The social network has found itself in the U.S. Moat Index three times since its initial public offering in 2012, when it was immediately awarded a wide economic moat rating by Morningstar equity research. Although the company has traded closer to $200 per share in recent months than the $38.23 per share closing price on its May 18, 2012 IPO day, its trading history has not been entirely smooth.Related: Switching Costs Builds Moats and Retains Customers Each instance Facebook was included in the U.S. Moat Index, it was trading at an attractive price relative to Morningstar’s forward-looking fair value estimate. For much of the rest of Facebook’s trading history, it has traded at or above Morningstar’s fair value estimate, which meant its exclusion from the index. There was a full five-year stint when Facebook was not included in the index. Then a selloff in the summer of 2018 presented a compelling allocation opportunity. Facebook was added to the index in September 2018 and its weighting increased in December 2018. Date Included Date Removed Facebook Inc.Total Return (%) S&P 500 IndexTotal Return (%)
9/24/201212/21/201214.87-1.446/24/20139/20/201393.607.959/24/2018N/A*18.701.7512/24/2018N/A*54.7822.72*Facebook was added to the U.S. Moat Index in September 2018 and its position was subsequently increased at the December 2018 review. It remains in the index and returns are for these positions are displayed though April 30, 2018. 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.To be fair, not all allocations play out as well or as quickly as Facebook. Some companies take longer to right wrongs, or in some cases, Morningstar simply misses the mark on their economic moat or valuation research. A key to investing is getting it right more often than getting it wrong
, and looking at long-term performance, we think it is fair to say there is something to Morningstar’s moat investing philosophy.