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What's Driving the Wide Moat Focus Outperformance

Andrew Lane

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 roughly 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 third quarter of 2018, the Wide Moat Focus Index outperformed its benchmark, the Morningstar US market index, by 23 basis points. Through the first nine months of 2018, the strategy only slightly bested its benchmark by a total of 8 basis points, having delivered an absolute total return just shy of 11%. Since the index's October 2007 live inception date, it has beaten its benchmark by nearly 4% annually, an impressive long-term track record.

Perhaps most interesting about this performance is the fact that high-quality, wide-moat stocks often underperform during upward-trending markets like those witnessed the last few years. However, fighting against the grain of this factor-based headwind, the Wide Moat Focus Index has still soundly outperformed.

In the third quarter from a sector weighting perspective, the Wide Moat Focus Index benefited most from being overweight healthcare names, although an underweight position in the technology sector served as a headwind. From a stock selection standpoint, the healthcare sector again stood out as a positive contributor, while the top three performers overall on a selection effect basis were Eli Lilly, Starbucks, and Express Scripts.

With strong momentum headed into the fourth quarter, we're hopeful that 2018 will be another solid year for the Wide Moat Focus Index.