Build a Better Core. Don’t Fall In and Out of Style
- 06 mins 28 secs
In the face of ongoing market turbulence, sound companies with a sustainable competitive advantage and attractive valuations can provide investors with core stability. Learn how a moat investing strategy, powered by Morningstar's forward-looking equity research, can be incorporated into a portfolio.Channel: VanEck
Joining us now to talk about VanEck’s moat investing strategy is Brandon Rakszawski, VP and Director of Product Management at VanEck. Brandon, great to have you back with us.
It's great to be back. Thanks for having me.
Brandon, MOAT’s investment strategy is driven by Morningstar's equity research, and as the name implies, they're focused on economic moats. Can you tell us about moat ratings and why they're important?
That's right. The VanEck Morningstar Wide Moat ETF (Ticker: M-O-A-T) tracks an index from Morningstar—the Morningstar Wide Moat Focus Index—which as the name implies, is fully focused on wide moat companies.
Now, moat companies are important, because these companies have been identified amongst a broad array of U.S. equities as companies that have established a competitive advantage—one that is strong but also sustainable well into the future. And this concept of economic moats really serve as the foundational element of Morningstar's equity research.
MOAT also considers valuations. Of course, Brandon, could you share a little bit more about how it incorporates valuations into the investment process?
That's right. Valuations, we have found, are really critical. As I alluded to, a lot of people want to own great companies. If a company is a well-run sound business, most investors may seek out exposure to that particular company, so you may have to pay a premium to own great companies. That's just the reality. If you can buy great companies that may be mispriced at the time, that is when you can really position a portfolio for potential success.
That's what this particular strategy does. It's another aspect of Morningstar’s equity research that is leveraged by this index-based strategy in a systematic way. In the same way that Morningstar equity research analysts are assigning an economic moat rating to measure and assess the company's competitive advantage and profitability prospects, Morningstar equity research analysts are also using that information to inform their valuation assessment of a company. They are forecasting those company's future free cash flow well into the future, discounting those back to today to determine a current intrinsic value for a company.
But when you add that valuation element that's where you can see the most success. And we have seen the most success in terms of outperformance versus the broad U.S. equity market. The S&P 500, for example, over long periods of time, 5-10 year time periods, this strategy had delivered more often than not excess returns relative to the broad market.
Finally given the current environment, Brandon, how are advisors using MOAT?
We've talked with many, many advisors over the years. MOAT has been in the market for 10 years. Its underlying index has been live for 15+ years. And the ETF has grown and now currently sits above $6B in assets despite the market turmoil we've lived through over the last six to nine months. And we found that advisors use MOAT in a couple of different ways.
Those that are open to core allocations outside of cheap beta allocations have very much looked to MOAT as a core U.S. equity position in their clients’ portfolios for the reasons I outlined—those excess returns that the strategy has historically delivered over long periods of time.
The strategy is able to target mispriced companies on a regular basis, very frequently, quarterly through its index review process. The index has historically also been able to exploit or take advantage of market turmoil and oftentimes can position itself to participate and sometimes often participate in a bigger way in market recovery.
We've seen advisors looking at the strategy now, trying to understand where those allocations have shifted over the last 9-12 months. And one last point that's actually I found very interesting is you have advisors that simply will stick to beta for their core.
They may even have an active manager that they've used for a very long period of time and have delivered successful returns in that core U.S. equity category. But they may look to a value manager or a growth manager and dial up their client’s exposure to value or growth.
Well, what MOAT can do, because it's style agnostic, it will essentially allocate to the areas of the U.S. large-cap market that are signaling valuation opportunities within that wide moat equity universe.
The strategy will shift from value to growth, and we've actually seen a little bit of a growth posture developed over the last 3-6 months as more and more evaluation opportunities have become available within the growth space.
Advisers looking at this strategy from the core aspect as well as using it to handle those style-based decisions for U.S. equity.
Well, Brandon, always great to have you. Thanks for joining us.
My pleasure, thank you for having me.
And thank you for watching. Once again, that was Brandon Rakszawski, VP and Director of Product Management at VanEck. I'm Jenna Dagenhart with Asset TV, and to learn more you can visit vaneck.com/subscribe.