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Three Reasons Not to Give Up On Quality Stocks, Funds

Why investors should stick with wide-moat funds.

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Investing in mega-cap, high-quality companies like  Wal-Mart (WMT) and  Johnson & Johnson (JNJ) hasn't been the best investment strategy the past two years. While these stocks have appreciated, they've underperformed the S&P 500 Index by a wide margin, as shown in the table below that compares the returns of Morningstar's Wide, Narrow, and No Moat indexes with those of the S&P 500.

The Morningstar Wide Moat Index includes big, financially sound, brand-name companies, such as  Coca-Cola (KO) and  Procter & Gamble (PG), that Morningstar's equity analysts believe can earn returns above their cost of capital for years to come. In other words, these are high-quality stocks. The Narrow Moat Index is composed of companies with less-durable competitive advantages, including  Kraft (KFT) and  Yahoo (YHOO). The No Moat Index includes companies in cut-throat industries that have trouble earning their cost of capital, such as  Ford (F),  Sprint Nextel (S), and  Delta (DAL). The S&P 500 Index meanwhile is a mix of all three moats--41% wide, 46% in narrow, and 13% none.

Quality Has Lagged for Two Years in a Row

Ryan Leggio has a position in the following securities mentioned above: VIG. Find out about Morningstar’s editorial policies.