Are These Funds' Glory Days Behind Them?
These recent high-fliers may cede ground to higher-quality funds.
No-moat stocks have made a compelling case for themselves these past two years--Morningstar's No Moat Index has outpaced the S&P 500 as well as Morningstar's Wide Moat and Narrow Moat Index by a wide margin.
But no investment style or strategy's heyday lasts forever. According to this article by Morningstar fund analyst Ryan Leggio, Morningstar data indicate that any one investment trend could go in and out of style very quickly--with outperformance and underperformance frequently running in cycles of three or more years. And given the signs of inflation that have been grabbing headlines as of late, our analysts suggest that moat-worthy firms will be more resilient in an inflationary environment than companies without a competitive advantage.
That doesn't mean you need to completely scrub your portfolio of narrow- and no-moat firms; they'll still provide valuable diversification in certain environments, as Christine Benz points out in this video. But if you're rebalancing your portfolio or otherwise making changes, less-moat-worthy firms and funds--particularly those that have recently enjoyed a very strong performance run--could be ripe for a pruning.
Subscribers to Morningstar.com's Premium service can see moat ratings for their holdings on the quote and Analyst Report pages. To help home in on mutual funds with a big share of their portfolios in no-moat companies, we turned to our Premium Fund Screener. In an effort to winnow down that group of offerings to those that have been riding the coattails of the no-moat rally, we screened on distinct portfolios of domestic stock funds with an average stock moat rating of none. (Morningstar assigns average moat ratings for mutual funds when at least 50% of a fund's underlying stocks have moat ratings.) Premium members can replicate this screen by clicking here. The screener yielded 21 funds. We highlight two below.
Esther Pak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.