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  • Moat Investing

    Fair Value, Rinse, Repeat: A Key to Moat Investing

    Brandon Rakszawski, Senior ETF Product Manager
    February 12, 2019
     

    For the Month Ending January 31, 2019

    The Morningstar® Wide Moat Focus IndexSM (MWMFTR, or "U.S. Moat Index") started the year strong, posting a return of 9.45% in January, which represents a notable outperformance of the broad markets as represented by the S&P 500 Index (8.01%) and Morningstar US Large Cap Index (7.59%).

    Target Attractive Valuations and Repeat

    A key to the U.S. Moat Index’s success is getting valuations right. Morningstar’s equity research team adopts a forward-looking approach that includes forecasting a company’s future free cash flows to determine its current fair value estimate. The index’s methodology is designed to allocate to moat companies that appear most attractively priced at each quarterly index review. The assumption is that the market will realize the intrinsic value of these companies and bring their market price more in line with Morningstar’s view of fair value.

    Several companies in the index proved that assumption correct in January. Facebook (FB) was added to the index in September and December of 2018. The stock began to appear attractively priced after a July sell-off that was triggered by earnings estimate revisions and ongoing privacy concerns with the social network. By the end of January, FB was the top contributor to the U.S. Moat Index’s performance for the month, after beating fourth-quarter consensus estimates.

    Facebook: 1 Year Price and Fair Value as of 1/31/2019

    U.S. Moat Stock: Facebook

    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.

    Compass Minerals (CMP) was also among January’s top performers following a difficult fourth quarter. Morningstar analysts have lowered its fair value estimate for CMP several times over the past three years but recently held steady at $81 per share. CMP finished the month trading around $52 per share, representing significant upside potential according to Morningstar’s valuation research.

    Only five of the U.S. Moat Index’s 49 constituents posted negative returns for the month. The top detractors from performance were two healthcare companies: Medtronic PLC (MDT) and Bristol-Myers Squibb Company (BMY). BMY sold off at the beginning of January after announcing the acquisition of Celgene. It recovered slowly throughout the month and finished January with a roughly 4% loss in share price. Morningstar analysts believe the acquisition creates value and expands BMY’s pipeline.

    Moat Index’s Stock Selection Battles Back

    The U.S. Moat Index’s outperformance of the Morningstar US Large Cap Index in 2018 (-0.74% vs. -3.44%, respectively) was driven exclusively by beneficial sector over- and underweights (i.e., allocation effect1). In fact, stock selection (i.e., selection effect2) was detrimental to relative returns in 2018.

    January saw a complete reversal of this. The outperformance posted by the U.S. Moat Index was driven by strong stock selection which is more in line with the index’s historical driver of outperformance.

     

    Important Disclosures

    1Allocation effect is the portion of portfolio excess return attributed to taking different group bets from the benchmark. (If either the portfolio or the benchmark has no position in a given group, allocation effect is the lone effect.) A group’s allocation effect equals the weight of the portfolio’s group minus the weight of the benchmark’s group times the total return of the benchmark group minus the total return of the benchmark in aggregate.

    2Selection effect is the portion of portfolio excess return attributable to choosing different securities within groups from the benchmark. A group’s selection effect equals the weight of the benchmark’s group multiplied by the total return of the portfolio’s group minus the total return of the benchmark’s group.

    The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    This commentary is not intended as a recommendation to buy or to sell any of the sectors or securities mentioned herein. Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here https://www.vaneck.com/etf/equity/moat/holdings/.

    An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.

    Fair value estimate: the Morningstar analyst's estimate of what a stock is worth.

    Price/Fair Value: ratio of a stock's trading price to its fair value estimate.

    The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Vectors Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar Wide Moat Focus Index is a service mark of Morningstar, Inc.

    The Morningstar Wide Moat Focus Index consists of U.S. companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.

    S&P 500® Index: consists of 500 widely held common stocks covering the leading industries of the U.S. economy.

    Morningstar® US Large Cap IndexSM tracks the performance of U.S. large-cap stocks that represent the largest 70 percent capitalization of the investable universe.

    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.

    The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright ©2019 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

    An investment in the VanEck Vectors Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, investing in the health care, consumer discretionary, industrials, financial services sectors, medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, which may make these investments volatile in price or difficult to trade. Medium-capitalization companies may be subject to elevated risks. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

    Fund shares are not individually redeemable and will be issued and redeemed at their net asset value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Past performance is no guarantee of future results.

    Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider a Fund's investment objective, risks, charges and expenses carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.