These Mutual Funds Invest in the Best
Wide-moat stocks aren't just for investors in individual equities.
Ongoing market volatility has had a silver lining: Stocks, according to Morningstar analysts' bottom-up assessments, are now trading a hair below fair value. And what our analysts call wide-moat stocks--companies with sustainable competitive advantages--are trading even more cheaply than the typical company in our coverage universe.
Another attraction of wide-moat firms? They've tended to hold up better than the broad U.S. equity market in sell-offs. In 2008, for example, the Morningstar Wide Moat Focus Index lost less than 20%, well below the S&P 500's 37% drop that year. For investors who are concerned that the current rally's days are numbered, the potential for better-than-average downside performance is particularly appealing.
In an article last week, I highlighted a handful of companies that have what I consider the trifecta of attractive attributes: wide moats; high star ratings, indicating that Morningstar's equity analysts think the company is trading well below their estimates of fair value; and low fair value uncertainty ratings, meaning that the analysts have a good deal of confidence in their fair values.
But the moat concept can also be transported to funds. For each fund and exchange-traded fund portfolio, Premium Members can see what percentage of that portfolio is parked in wide-, narrow-, and no-moat stocks. (To view this information, click on the "Portfolio" tab for a given mutual fund or ETF, then click "Premium Details.") Premium Members can also use Morningstar's
to screen on funds' average moat ratings.
I recently did just that, screening for Morningstar Medalist funds that are open to new noninstitutional investors and have average moat ratings of wide. Twenty-four funds made the cut as of Aug. 4. The list included some of the usual suspects (
Premium Members can click
to view the complete output or tweak the screen to their liking. Here's a closer look at three of the funds that made the cut.
Category: Large Value | Analyst Rating: Silver | Wide-Moat Stocks: 70%
Senior analyst Kevin McDevitt acknowledges that this fund's recent performance looks woeful. Like other funds focused on high-quality companies with moats, it has struggled to keep up in a market led by more speculative stocks. This concentrated fund has suffered from sins of commission, too: Top-weighted pick
Category: Large Blend | Analyst Rating: Silver | Wide-Moat Stocks: 75%
So-called strategic-beta funds are all the rage these days, but this fund has employed a strategic-beta approach since 1997. It's also far cheaper than many strategic-beta products. The fund ranks the largest 150 U.S. stocks by market capitalization but limits positions in any one industry to four stocks. These companies are then equal-weighted into a portfolio of just 35 holdings. Because the fund focuses on such large companies (its average market cap is larger than almost every other mutual fund), it tends to have a high-quality tilt overall. The process of equal-weighting also helps ensure that it's not gorging itself on particularly expensive names. (The portfolio tends to have a value tilt relative to the large-blend category.)
Ivy Large Cap Growth
Category: Large Growth | Analyst Rating: Bronze | Wide-Moat Stocks: 65%
This advisor-sold fund's management team focuses on companies with strong profitability and sustainable competitive advantages, so it's probably not surprising that it made our list of mutual funds with a wide-moat emphasis. Analyst Leo Acheson chalks up its disciplined process and solid long-term track record to its highly experienced management team. (The two managers in charge here also run sibling