Moat Stocks Gain as Mega-Caps Falter
09 August 2024
Read Time 6 MIN
July saw a notable shift in U.S. equities. The Magnificent 7 tech sell-off drove a divergence between mega-cap growth stocks and the more value-oriented and smaller large-cap segment of the market. Nvidia and the rest of the Mag 7 have led the market for much of the year, and their sharp declines in July pulled down the broader market indexes. Meanwhile, small-caps and value-oriented areas of the market saw significant gains during the same period. While this rotation out of the mega-caps has only recently emerged, this trend may just have legs as many investors now appear to be looking for ways to reduce their exposure to the historic levels of concentration in equity markets today.
The Morningstar Wide Moat Focus Index (the “Moat Index”) significantly outperformed in July. Driving this outperformance was an underweight to mega-cap tech, as well as strong stock selection, particularly within the industrials sector. More on drivers of performance are below. Year-to-date, the Moat Index remains a laggard to S&P 500, given its value bias and structural underweight to mega-caps, but this contrarian positioning may prove favorable going forward as market dynamics shift.
After months of struggle, U.S. smaller cap stocks staged a remarkable turnaround in July. A strong consumer price index (CPI) release on July 11 was a primary catalyst for this rally in smaller names. The CPI report showed further easing in inflation, increasing the market-implied odds of a September rate cut by the U.S. Federal Reserve. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) trailed pure small-caps, but slightly outpaced mid-caps in July.
Moat Stocks Rebound in July
Source: Morningstar. Data as of 31/07/2024. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
The Beginning of a Magnificent Rotation?
Much of this year has been characterized by extreme levels of concentration within the U.S. equity market, driven by the Magnificent 7 and the mania around AI. Over the last few weeks, Nvidia and mega-cap tech have stumbled in what could be characterized as the start of a “Magnificent Rotation.” Stretched valuations and questions around when the massive capital expenditures in AI will begin to deliver a return have led investors to take some chips off the table and rotate into more value-oriented areas of the market.
Since Nvidia’s mid-June all-time high, it has fallen roughly 20% through the beginning of August, dragging down the broader market, while the Moat Index had a positive return during the same period. The Moat Index benefited from its focus on high quality companies with attractive valuations, which has guided it toward a slight value bias and pushed it away from mega-cap tech. The Moat Index’s positioning has been a headwind for much of 2024, but may now prove beneficial considering current market dynamics. Further illustrating the rotation away from the Mag 7, the equal weighted variant of the S&P 500 index was also up during the period; however, its low-conviction methodology that indiscriminately allocates equally to all 500 constituents lagged the Moat Index.
Moat Index Rebounds on Rotation Away from Mega-Caps
Source: Morningstar. As of 01/08/2024. Past performance is no guarantee of future results. Index performance is not representative of fund performance. It is not possible to invest directly in an index.
Moat Index Highlights: Notable Stock Selection
Beyond the underweight to mega-cap tech, strong stock selection within the strategy was also a notable driver of relative performance in July. Selection effect during the month accounted for over 300 basis points of outperformance versus the S&P 500. The majority of that is attributable to Industrial names, which are heavily featured in the top contributors table this month.
Consumer credit bureaus TransUnion (TRU) and Equifax (EFX) were both top contributors to performance during the month off the back of strong second quarter earnings results that sent shares of TRU and EFX up 21% and 15%, respectively. On TransUnion, Morningstar equity analyst Rajiv Bhatia maintained his $100 fair value estimate, noting that he continues to view the risk/reward profile on TRU shares as attractive. Other top contributors within Industrials include aerospace and defense manufacturer RTX as well as residential and commercial security products company Allegion (ALLE), which were each up over 15% in July.
Names detracting from the Moat Index this month were largely within the Technology sector, with the semiconductor industrial automation equipment provider Teradyne Inc. (TER) and the well-known mega-cap tech conglomerate Alphabet (GOOGL) both as top detractors. Other detractors include Charles Schwab (SCHW), global beauty products seller Estee Lauder (EL) and drug manufacturer Biogen (BIIB).
Top Contributors and Detractors from Moat Index - July 2024
Leading Contributors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| TransUnion | TRU | Industrials | 2.33 | 0.51 |
| RTX Corp. | RTX | Industrials | 2.56 | 0.44 |
| Allegion | ALLE | Industrials | 2.35 | 0.37 |
| Bristol-Myers Squibb Co. | BMY | Healthcare | 2.20 | 0.36 |
| Equifax Inc. | EFX | Industrials | 2.32 | 0.35 |
Leading Detractors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Teradyne Inc. | TER | Technology | 1.68 | -0.19 |
| Charles Schwab Corp. | SCHW | Financial Services | 1.35 | -0.16 |
| The Estee Lauder Companies Inc. | EL | Consumer Defensive | 2.10 | -0.13 |
| Biogen Inc. | BIIB | Healthcare | 1.30 | -0.10 |
| Alphabet Inc. | GOOGL | Technology | 1.72 | -0.10 |
Source: Morningstar, July 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
SMID Moat Index Highlights: Morningstar Raises Allegion Fair Value Estimate
The smaller cap SMID Moat Index also benefited from the above-mentioned TransUnion (TRU) as the mid-cap stock’s July performance led the pack of SMID moat companies as well. Regional automobile dealership Asbury Automotive Group (ABG) was also a top contributor as shares rose over 18% in anticipation of its early August quarter earnings report. Another top contributor was Allegion (ALLE), a global leader in security products and solutions, which saw its share price spike following a strong earnings report. Morningstar’s Brian Bernard noted that wide-moat Allegion’s second quarter financial performance came in ahead of expectations with increased forward guidance as well. Brain raised his fair value estimate to $151 per share due to a more optimistic near-term revenue growth profit margin outlook.
Names that most negatively contributed to the SMID Moat Index performance during the month include internet content and e-commerce platform Pinterest (PINS), North America’s second-largest ride-sharing service provider Lyft (LYFT), packed food company Lamb Weston (LW), the largest global cruise company Carnival (CCL), and independent broker/dealer LPL Financial (LPLA), which all declined by double digits in July.
Top Contributors and Detractors from SMID Moat Index - July 2024
Leading Contributors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| TransUnion | TRU | Industrials | 1.26 | 0.28 |
| Asbury Automotive Group | ABG | Consumer Cyclical | 1.40 | 0.26 |
| Mattel Inc. | MAT | Consumer Cyclical | 1.21 | 0.23 |
| SS&C Technologies | SSNC | Technology | 1.37 | 0.23 |
| Allegion | ALLE | Industrials | 1.29 | 0.21 |
Leading Detractors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Pinterest Inc. | PINS | Communication Services | 0.82 | -0.23 |
| Lyft Inc. | LYFT | Technology | 1.13 | -0.17 |
| Lamb Weston Inc. | LW | Consumer Defensive | 0.57 | -0.16 |
| Carnival Corp. | CCL | Consumer Cyclical | 1.47 | -0.16 |
| LPL Financial Inc. | LPLA | Financial Services | 0.67 | -0.14 |
Source: Morningstar, July 2024. Past performance is no guarantee of future results. Index performance is not illustrative of fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
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This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions. This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
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VanEck Asset Management B.V., the management company of VanEck Morningstar US SMID Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck Morningstar Global Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
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Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Sustainable Wide Moat UCITS ETF (the "ETF"), a sub-fund of VanEck UCITS ETFs plc, is a UCITS management company under Dutch law registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the Central Bank of Ireland, passively managed and tracks an equity index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets. Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIIDs/KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:
UK - Facilities Agent: Computershare Investor Services PLC
Austria - Facility Agent: Erste Bank der oesterreichischen Sparkassen AG
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Sweden - Paying Agent: Skandinaviska Enskilda Banken AB (publ)
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It is not possible to invest directly in an index.
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