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 Premium Fund Screener 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 ( Vanguard Dividend Growth (VDIGX), come on down!) as well as lesser-known funds such as Osterweis (OSTFX) and Ivy Large Cap Growth (WLGAX).
Premium Members can click here 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.
AMG Yacktman Focused Service (YAFFX)
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 Procter & Gamble (PG)--11% of assets as of its last portfolio--recently tumbled due to mixed earnings results, for example. But McDevitt points out that the fund's typical performance pattern has been to underwhelm during rallies while earning its keep on the downside. He also notes that management has been marshaling its defenses recently, holding cash in lieu of investing in overpriced merchandise and de-emphasizing consumer discretionary stocks while tilting toward sturdy consumer staples. The Gold-rated AMG Yacktman (YACKX), which employs the same general philosophy but is less concentrated, also made our list.
Bridgeway Blue Chip 35 (BRLIX)
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 Waddell & Reed Vanguard (UNVGX), which also made our list of wide-moat funds.) That said, as a large-growth fund, this offering isn't a cinch to outperform in a downturn: While it has been less volatile than its large-growth peers over long time frames, its volatility, as measured by standard deviation, has been higher than the S&P 500's. The fund may carry a sales charge, depending on the channel through which it's purchased.
Christine Benz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.