Morningstar Moat Funds

[Packer16]

I have been looking at the Morningstar moat index ETFs (WMW and MOAT) as alternatives to the BRK and FFH default options for my funds.  The funds are based upon the highest rated (cheapest to FV) high moat stocks in the Morningstar universe.  They appear to outperform the market by about 900 bp over the past five years better than most funds (even SEQUX).  Has anyone invested in these?

 

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[wachtwoord]

Not directly, but I do place a very high value in the Morningstar's moat analysis when choosing to invest in a stock and used the holdings of these funds as investment ideas.

[Guest wellmont]

that's because they are fully invested. sequx has an average of 15% cash position during this time. that hasn't helped in a tape that's been almost straight up since late 2008. I like to look at risk adjusted returns. And sequx beats the index in my book when you look at it that way.

[Packer16]

If you look at 2008 however, the cash a SEQUX did not prevent it from falling more than WMW.  SEQUX fell by 27% while WMW fell by only 20%.  In my book, I look at downward volatility (loss) as more important than a deviation from the mean.  WMW had more lumpy returns but had less loss when a negative event occurred.  I think that is what skewing the risk adjusted return of SEQUX vs. WMW.

 

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[Guest wellmont]

when I compare a 5 year chart of WMWIV to sequx on google finance, the blue line (moat index) goes down lower than sequx in late 2008. Because it is fully invested it begins to outperform sequx. don't forget moat is a one trick pony. it can't change it's style. and those stocks it holds have outperformed. sequx can change it's style. it can flexible. sequx also holds smaller stocks and foreign stocks. but you  may be on to something. I just think over long cylcles you'll do better with less risk in sequx.

[Packer16]

WMW I believe changes companies every year.  Sequoia in my mind is similar in that you are not going to see that much change in apply a quality value strategy.  WMW is probably the best screen best fund I have seen out there.  Even better the Greenblatt's US Formula fund (with less fees also).  Sequoia does have the human advantage (incorporating factors not included in MS valuation and concentration in certain stocks) but the cash disadvantage.  It looks like the decline depends upon your starting point (Jan 2008 versus Jun 2008).  I do have Sequoia in my 401(k) along with Fairholme.  Maybe I can see if we can get one of these ETFs included also.

 

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[starmitt]

WMW is an ETN.

 

Morningstar reconstitute the underlying index quarterly.

[Packer16]

Thanks for clarification.

 

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[no_free_lunch]

I have been thinking about this one for awhile now.  I keep wondering in my head why I'm doing so much work on ideas when I can buy an etf that will probably give similar results.

 

The main drawbacks I have thought of:

 

1) Not internationally diversified.  I am not sure I care.

2) There is actually little to no benefit to wide moat stocks versus low / no moat stocks, even based on morningstar's analysis.  The main outperformance seems to come from picking the cheapest stocks relative to fair value.  Not really an issue per se but something to be aware of.  I would still prefer wide moat stocks, just in case.  Maybe they have been lucky for the past 10 years, who knows, if it was all luck at least I own cheap companies with moats so hopefully won't significantly underperform.  Or in other words, at least the methodology is one that I understand and where it makes sense that it would outperform.

3) They seem to be large cap focused.  I don't think they necessarily have to be, but when you look at the index it is mostly large to mega caps.  If there was a version that invested in say 50 small large moat, cheap small-caps that would be ideal.

[wachtwoord]

To my mind it makes sense that the collection of large moat companies is weighted heavily towards larger companies, merely by how moats are defined. Am I wrong in this?

[CorpRaider]

I would point out that the expense ratio on the FNSAX (the select version) is lower than the FVVAX one with 500-1000 securities (presumably due to lower transaction costs).  Also, the MOAT expenses were higher than the .50% but were rebated back due to a cap that expires in 2014. 

[bargainman]

2) There is actually little to no benefit to wide moat stocks versus low / no moat stocks, even based on morningstar's analysis.  The main outperformance seems to come from picking the cheapest stocks relative to fair value.  Not really an issue per se but something to be aware of.  I would still prefer wide moat stocks, just in case.  Maybe they have been lucky for the past 10 years, who knows, if it was all luck at least I own cheap companies with moats so hopefully won't significantly underperform.  Or in other words, at least the methodology is one that I understand and where it makes sense that it would outperform.

3) They seem to be large cap focused.  I don't think they necessarily have to be, but when you look at the index it is mostly large to mega caps.  If there was a version that invested in say 50 small large moat, cheap small-caps that would be ideal.

 

Just FYI:

 

 

Investment Objective and Strategy

The investment seeks to replicate, net of expense, the Morningstar Wide Moat Focus Total Return Index. The index contains companies that have sustainable competitive advantages and that trade at discounts or Morningstar's determination of their fair value. It contains approximately 20 companies.