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Small- and Mid-Cap Funds With Moats in the Making

These funds focus on high-quality up-and-comers.

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In a recent Fund Spy article, Ryan Leggio discussed some compelling reasons why investors should not turn their backs on funds with a large share of their assets in wide-moat stocks. We've also written about the value of owning wide-moat stocks in a portfolio and how to screen for moat-heavy mutual funds using our  Premium Fund Screener.

In the realm of small- and mid-cap funds, however, it can be difficult to turn up offerings with a large share of their assets in wide-moat stocks. The reasons are twofold. First, a stock must be under analyst coverage to earn any moat assignment at all, and the universe of companies that have Morningstar analyst coverage skews toward large-cap names. Even more important, wide-moat companies are frequently large firms, simply because these firms' sustainable competitive advantages have given them the ability to grow to a broad size.

But some investors ask if there are small- and mid-cap funds with "emerging moat" names--companies that are on their way to building sustainable competitive edges versus their peers.

Esther Pak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.