Valuations Steer Moat Index’s Contrarian Bias
26 June 2024
Read Time 2 MIN
The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) underwent its quarterly review on June 21, 2024. The Index’s review process systematically targets attractively priced, high quality U.S. companies. Below are some key takeaways from the June review and how the Moat Index is positioned entering the second half of 2024.
Moat Index Review Takeaways: Value Bias, Mag 7 Underweight, Valuation Discount
- Staying the Course as Valuations Lead the Way
The Moat Index entered 2024 with a contrarian bias toward large cap stocks (as opposed to the mega caps that dominate the S&P 500 Index) and a very slight value posture. That bias has remained through the first two quarter reviews of the year. The Moat Index remains notably underweight growth stocks relative to the S&P 500 with core stocks that exhibit characteristics of both growth and value making up much of the difference. The recent exposure has reflected the valuation opportunities in the U.S. market among high quality, wide moat companies as the Index’s systematic, rules-based process avoids the tendency to follow the crowd.
- The Magnificent 7 Continues its Climb
The S&P 500 Index, widely owned by investors of all types by way of index funds, has seen several of the Magnificent 7 companies battle it out for the title of largest market cap over the last several weeks. The result: more Magnificent 7 exposure in investors’ portfolios (and more influence on market returns). While Magnificent 7 exposure has increased from 28% of the S&P 500 at the end 2023 to 32% at present, the Moat Index comprises only 4.4% by way of Alphabet, Amazon, and Microsoft. The Moat Index has been consistently underweight these seven companies, offering investors differentiated exposure to U.S. equities.
- U.S. Equity Exposure Without the Lofty Valuations
The price/fair value ratio of the S&P 500 Index currently sits at 1.05. This implies that the companies in the S&P 500 are, overall, trading at approximately a 5% premium, according to Morningstar. This presents a challenge for investors looking to deploy cash into U.S. markets that have already appreciated by more than 15% this year. The Moat Index represents high quality companies currently mispriced by the market, in Morningstar’s view. It allows investors to consider a mix of well-positioned companies with upside potential. Currently, the Morningstar price/fair value ratio of the Moat Index is 0.81, implying a 19% discount to fair value.
2Q 2024 Moat Index Review Results
Moat Index Sector Shifts Following 2Q 2024 Review
Moat Index Sector Exposure Relative to S&P 500 Index
Moat Index Style Exposure Relative to S&P 500 Index: Value Bias Persists
Source: Morningstar. As of 6/21/2024 unless otherwise noted.
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