Skip directly to Accessibility Notice

Top Moat Stocks in 2020: Veeva, ServiceNow and Amazon

14 January 2021

 

The Morningstar® Wide Moat Focus IndexSM (the “Index”) finished 2020 on a strong note, outpacing the S&P 500 Index by over 3% in the fourth quarter (15.28% vs. 12.15%, respectively). Its strong performance erased much of its mid-year underperformance but wasn’t enough to close the gap for the year, ending behind the S&P 500 (15.09% vs. 18.40%, respectively).

This was the first year in which the Index underperformed the S&P 500 by a notable amount since its 2014 and 2015 underperformance, which was followed by a very strong 2016 and subsequent years of impressive excess returns.

Index Calendar Year Return (%)

  2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Morningstar Wide Moat Focus Index -19.58 46.93 8.57 6.61 24.50 31.46 9.68 -4.28 22.37 23.79 -0.74 35.65 15.09
S&P 500 Index -37.00 26.46 15.06 2.11 16.00 32.39 13.69 1.38 11.96 21.83 -4.38 31.49 18.40
Difference +17.42 +20.47 -6.50 +4.50 +8.50 -0.93 -4.01 -5.67 +10.41 +1.96 +3.64 +4.17 -3.31

Source: Morningstar. Data as of 31/12/2020. Performance data quoted represents past performance. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. Prior to 16/10/2015, VanEck Morningstar US Wide Moat UCITS ETF had no operating history. For fund performance current to the most recent month-end, visit vaneck.com.

While there have been periods of underperformance in any given quarter or year, the impressive long-term track record of the Index stands out since its live history began in February 2007. When analyzing rolling periods of increasing length, the Index’s success relative to the S&P 500 improves as the holding periods increase. For example, since the Index’s inception in 2007, it has only outperformed the S&P 500 Index approximately 50% of the time over any given month. But in 100 of the 107 rolling five year periods, or 93% of the time, the Index outperformed the S&P 500 Index.

Batting Average: Morningstar Wide Moat Focus Index vs. S&P 500 Index

Monthly Frequency: 2/2007 – 12/2020

Batting Average: Morningstar Wide Moat Focus Index vs. S&P 500 Index
  1 Month Rolling Periods 6 Month Rolling Periods 1 Year Rolling Periods 3 Year Rolling Periods 5 Year Rolling Periods
Total Periods 166 161 155 131 107
Total Outperformed 83 92 101 112 100
Batting Average (%) 50 57 65 85 93

Source: Morningstar. Batting Average is measured by dividing the number of periods a portfolio or investment strategy outperforms a benchmark by the total number of periods.

What Drove Moat Index Returns?

Information technology companies contributed most significantly to the Index’ underperformance of the S&P 500 Index in 2020. The sector’s underweight paired with poor relative stock selection within the sector dragged on relative returns. Industrials stock selection was also a major contributor to underperformance while strong stock selection within consumer discretionary, energy and financials helped offset some of the Index’s short-term misses. 

Moat Stock Leaders in 2020

Veeva Systems Inc. (VEEV)

Veeva was the Index’s leading contributor to returns in 2020. It performed so well following the market’s March turmoil that its position in the Index was scaled down in June 2020 as valuations appeared pricey, only to see its stock price continue to appreciate in subsequent quarters. It finished the year posting strong third-quarter results in early December.

Veeva is a leading supplier of vertical software solutions serving customers ranging from small, emerging biotech companies to global pharmaceutical manufacturers. It benefits from switching costs, or the cost (time, productivity, operational risk, etc.) associated with changing software solutions from one provider to another. Within the life sciences industry, where pharma and biotech companies have strict workflows for clinical trials, R&D and manufacturing, Morningstar believes switching costs are exacerbated.

Morningstar increased Veeva’s fair value estimate from $275 per share to $290 in December, citing the company’s strong quarterly results and continued long-term investments. Its shares finished the year trading at a slight discount to Morningstar’s fair value assessment.

ServiceNow Inc. (NOW)

ServiceNow is a software as a solution (SaaS) provider primarily focusing on the IT function for enterprise customers. It, like Veeva, benefits from high customer switching costs associated with its software offerings. ServiceNow specializes in Information Technology Service Management (ITSM) and, according to Morningstar, built its business model from the ground up in 2004 as a SaaS solution. It has disrupted the industry and controls approximately 40% of the ITSM market, which is growing at a rapid pace.

ServiceNow was most recently added to the Index in September and December 2019. After appreciating significantly from April lows, its position was scaled back in September 2020, locking in some of its gains in the portfolio. ServiceNow was the second leading contributor to Index returns in 2020 and a top performer within the tech sector. It finished the year trading at a premium to its Morningstar fair value estimate despite a slight increase to the estimate in October.

Amazon.com Inc. (AMZN)

Amazon has benefited through the global pandemic, as consumers have accelerated online buying behavior. According to Morningstar, Amazon owns one of the wider economic moats in the consumer sector and is likely to reshape retail, digital media, enterprise software and other categories for years to come. Its operational efficiencies, network effect and brand intangible assets give its marketplaces sustainable competitive advantages that few, if any, traditional retailers can match.

Amazon was likely a shining star in many investor portfolios this past year. Most U.S. equity strategies hold significant exposure to Amazon, which is likely overrepresented in many portfolios. The Morningstar Wide Moat Focus Index features a structural underweight to Amazon due to its equal-weighting methodology, which typically limits Amazon’s weight in the Index. This structural underweight carries through to other FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon and Google) and is exacerbated by Apple and Netflix receiving narrow moat ratings from Morningstar and not being eligible for the Index. Knowing how critical these companies have been to short- and long-term U.S. market returns makes the Index’s long-term track record all the more impressive.

Moat Stock Laggards in 2020

Wells Fargo & Co (WFC)

We’ve written about Wells Fargo quite a bit in recent years as it navigated scandals and management turnover. It remains one of the top deposit gatherers in the U.S., and according to Morningstar, the bank has easily out-earned its cost of equity for decades and continues to do so today. Morningstar considers its wide moat rating to be stable.

Despite its competitive positioning, Wells Fargo was the leading detractor from Morningstar Wide Moat Focus Index returns in 2020. Morningstar believes Wells Fargo still faces many issues, including regaining a more positive reputation among potential advisor clients, turning around its asset management unit, and generally returning to offense instead of constantly being on defense. That said, Morningstar does not see a fundamental reason why the bank can't consistently earn returns on tangible equity of 14% longer term, which would warrant a better valuation. How long it will take the bank to rebuild remains a key unknown, and is a risk investors should consider.

Raytheon Technologies Corp (RTX)

Raytheon Technologies benefits from strong competitive positioning in both commercial aerospace and defense contracting resulting from the merger of United Technologies and Raytheon, both of which Morningstar believes warrant wide moats on their own. The company completed its merger shortly after the market bottomed in March 2020. The company’s shares recovered modestly but remained well below highs from February and finished the year at a modest discount to Morningstar’s fair value estimate.

RTX was the second leading detractor from performance for the year and is one of several aerospace and defense companies held by the Index. Aerospace and defense is currently one of the largest sub-industry overweights in the Index relative to the S&P 500 Index.

Biogen Inc. (BIIB)

Morningstar sees barriers to entry as high for potential biosimilars to Biogen's products, and Biogen has a strong R&D strategy for maintaining its leadership in multiple sclerosis and neurodegenerative diseases. Pricing power is strong, patient need for novel therapies is high, and Biogen has been building a solid pipeline in that space. On the flip side, Morningstar believes Biogen's profitability depends on three key blockbuster franchises and a high-risk but potentially high-reward pipeline.

This risk played out in 2020 as Food and Drug Administration hurdles have delayed the potential path forward for Biogen’s Alzheimer’s disease drug candidate, aducanumab. This uncertainty resulted in Morningstar decreasing its fair value estimate from $354 per share to $346. BIIB closed the year at nearly a 30% discount to fair value.

December Moat Index Review: Less Tech

The Morningstar Wide Moat Focus Index underwent its quarterly review in late December. Several new companies from the consumer sectors and aerospace and defense were added while several strong performing chip companies were removed, among others.

A notable shift following the review was a further shift away from tech. Already substantially underweight, the tech sector weighting in the Index dropped by 4.5% leaving the Index underweight tech companies by 10% relative to the S&P 500 Index.

VanEck Morningstar US Wide Moat UCITS ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.

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:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
Germany - Facility Agent: VanEck (Europe) GmbH
Spain - Facility Agent: VanEck (Europe) GmbH
Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
France - Facility Agent: VanEck (Europe) GmbH
Portugal - Paying Agent: BEST – Banco Eletrónico de Serviço Total, S.A.
Luxembourg - Facility Agent: VanEck (Europe) GmbH

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.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

© VanEck (Europe) GmbH / VanEck Asset Management B.V.

1 - 3 of 3