Skip to Content
Fund Spy

Five Great Funds That Own Wide-Moat Stocks

These funds prove that quality never goes out of fashion.

Mentioned: , , , ,

The stock market has been on quite a ride since March of this year. Major indexes are up more than 50% from their lows, driven by huge gains from the same type of risky investments that got pummeled in 2008's meltdown. While things might look much better for investors than they did a year ago, there are still plenty of reasons to be nervous. Most observers expect a slow and muted economic recovery over the next year, and many also think that the market is pricing in a stronger recovery than is likely to occur.

Mutual fund investors who want to exercise caution have options. One of the simplest is to buy stock funds that focus on relatively safe, stable firms with strong competitive advantages that allow them to get through tough economic times without too much damage. Even if we don't have a full-blown market correction any time soon, such quality stocks are likely to perform better than the risky stuff over time.

One way to identify high-quality mutual funds is through the economic moat ratings that Morningstar's stock analysts assign to each stock they cover. The ratings measure the strength of a company's competitive advantage, if any. Wide-moat stocks such as  Coca-Cola (KO) have significant competitive advantages over their peers, while narrow-moat stocks have lesser competitive advantages, and no-moat stocks lack such advantages. Calculating the weighted-average moat rating for a mutual fund portfolio gives a measure of how moat-heavy that fund is.

David Kathman has a position in the following securities mentioned above: VPMCX. Find out about Morningstar’s editorial policies.