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Funds That Go Moatless

Price discipline can offset some of the risks of investing in no-moat firms.

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In a free-market economy, capital seeks the areas of highest return, and whenever a firm develops a profitable product or service, competitive forces are fast to drive down economic profits. Only firms with economic moats--a structural competitive advantage that allows firms to earn long-term above-average returns on capital--are able to fend off competition, the theory goes.

To help investors identify firms with moats, our equity analysts assign one of three Morningstar Economic Moat Ratings: none, narrow, or wide. Some attributes that drive economic moats include network effects, intangible assets, cost advantage, high switching costs, and efficient scale. Firms that do not receive a narrow or wide moat rating do not possess durable competitive advantages, in the view of Morningstar analysts, and hence they may not earn above-average returns over the long term.

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Andrew Daniels does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.