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Fund Moat Ratings and the Bear Market

Wide-moat funds were the stars of the recent downturn.

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Back in December 2008, near the depths of the financial crisis, we took a look at average economic moat ratings for mutual fund portfolios and how those ratings correlated with fund returns in that year's market collapse. Morningstar stock analysts assign a moat rating to every stock they cover, representing the strength of its competitive advantages, if any. A wide-moat company (such as  Wal-Mart (WMT) or  Coca-Cola (KO)) has strong competitive advantages that keep competitors at bay; a narrow-moat company has less-compelling advantages; and a no-moat company lacks such advantages, making it tougher to hold off potential competitors and maintain long-term profitability.

In that article, which you can read here, we found that funds with the highest asset-weighted average moat ratings tended to be among their category's best performers over the previous 12 months, a period that included the worst of the 2008 bear market. This makes sense, because most investors were looking for safe havens during that time of fear and uncertainty, and wide-moat stocks tend to be very stable and predictable. Conversely, funds with the lowest average moat ratings tended to be among their category's worst performers over the same period. (We found similar correlations for funds' average fair value uncertainty ratings, which measure how confident our analysts are in the fair value estimates they assign to a stock.)

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