Consumer Cyclical Stocks Help Power Wide Moat Focus Index
High-quality, wide-moat stocks often underperform during upward-trending markets, but the strategy is fighting against the grain.
Andrew Lane: Within the Morningstar equity research department, we keep a close eye on the performance of the Wide Moat Focus Index, a collection of the cheapest U.S. wide-moat-rated stocks under our coverage. Typically, the strategy holds 40 to 50 stocks, with the reconstitution and rebalancing process taking place four times per year. The index is important to us, as its construction represents the cross section of our differentiated economic moat methodology and our rigorous bottom-up valuation work.
In the second quarter of 2018, the strategy outperformed its benchmark, the Morningstar US Market Index, by 155 basis points. However, year to date through the first half of 2018, the Wide Moat Focus Index is still slightly trailing its benchmark by a total of 16 basis points, having delivered an absolute total return just shy of 3%. This builds on very encouraging results in both 2016 and 2017, when the strategy outperformed its benchmark by 10 percentage points and 2.3 percentage points, respectively.