Moat Strategies Gain on Strong Stock Selection
13 September 2024
Read Time 6 MIN
In August, U.S. equity markets moved higher, driven by expectations of Federal Reserve rate cuts following Chairman Jerome Powell's comments at Jackson Hole. Powell's indication of policy adjustment, hinting at a shift from combating inflation to supporting economic growth, spurred a continuation of the market rotation from tech giants towards value stocks. This shift was underpinned by a cooling job market and controlled inflation, setting the stage for potential rate cuts, potentially as soon as the Fed’s September meeting. The market's reaction showcased a broadening of gains, reflecting optimism in policy easing and continued economic resilience, despite geopolitical tensions.
The Morningstar Wide Moat Focus Index’s (the “Moat Index”) strong July carried over into August1. Driving this outperformance was strong stock selection and supportive sector allocations with overweights in the consumer defensive and healthcare segments. Year-to-date, the Moat Index trails the S&P 500, given its value bias and structural underweight to mega-caps. However, the performance gap has narrowed considerably in the last two months, as market dynamics shift away from big tech and toward more value-oriented areas.
Smaller U.S. companies took a breather in August following their remarkable rally in July that saw small- and mid-cap indexes rise as much as 10%. The Morningstar US Small-Mid Cap Moat Focus Index (the “SMID Moat Index”) still found pockets of growth within the cohort, while the broader benchmark indexes were down slightly. The SMID Moat Index’s August outperformance was predominantly the result of favorable stock selection rather than sector over or underweights.
Moat Stock Outperformance Continued in August
Source: Morningstar. Data as of 31/08/2024. 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: Cybersecurity and Coffee Boost Moat Index
Strong stock selection within the Moat Index was the primary driver of relative performance versus the S&P 500 in August with cybersecurity and coffee providing a boost. Favorable sector allocation was also additive during the month with overweights in consumer defensive and healthcare contributing as well as an underweight to technology.
In the top slot of the contributors table this month is wide moat company Fortinet (FTNT). Fortinet is a leader in the security space with solutions ranging from network security firewalls to security operations. Morningstar believes that Fortinet’s platform approach to cybersecurity, which combines key aspects of a business’ security needs under one umbrella, has enabled the firm to grow its wallet share among existing clients while adding new ones. This approach led to a strong second quarter earnings release that saw revenue and profitability surpass expectations, sending Fortinet shares up over 30% during the month.
Also landing in the top contributors table this month is one of the world’s most widely recognized restaurant brands, Starbucks (SBUX). Shares of Starbucks exploded higher on news that the specialty coffee chain had lured Brian Niccol to head the company as new CEO. Niccol comes with a sterling restaurant industry track record from his time as CEO at the wide moat burrito chain Chipotle and the Mexican-inspired fast-food chain Taco Bell. Investors sent a strong message that leadership matters as shares of Starbucks finished up over 20% in August.
Names detracting from the Moat Index this month include the e-commerce marketplace operator Etsy (ETSY), global beauty products seller Estee Lauder (EL), drug manufacturer Pfizer (PFE), aerospace and defense company Boeing (BA), and industrial equipment and software business Emerson Electric (EMR).
Top Contributors and Detractors from Moat Index - August 2024
Leading Contributors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Fortinet Inc | FTNT | Technology | 2.08 | 0.67 |
| Starbucks Corp | SBUX | Consumer Cyclical | 2.18 | 0.48 |
| Kenvue Inc | KVUE | Consumer Defensive | 2.37 | 0.47 |
| Veeva Systems Inc | VEEV | Healthcare | 2.21 | 0.28 |
| Altria Group Inc | MO | Consumer Defensive | 2.68 | 0.26 |
Leading Detractors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Etsy Inc | ETSY | Consumer Cyclical | 2.38 | -0.35 |
| Estee Lauder | EL | Consumer Defensive | 1.87 | -0.23 |
| Pfizer Inc | PFE | Healthcare | 2.65 | -0.20 |
| Emerson Electric Co | EMR | Industrials | 1.28 | -0.11 |
| Boeing Co | BA | Industrials | 1.23 | -0.07 |
Source: Morningstar, August 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: Dashing Ahead on Stock Selection
The SMID Moat Index’s lead over small- and mid-cap broad benchmarks in August was driven by favorable stock selection rather than sector over or underweights. Leading the pack of SMID moat companies in August was the mid-cap food order aggregator and delivery company DoorDash (DASH). DoorDash released strong earnings at the beginning of the month, boasting quarterly records for key metrics like total orders and gross order value. Shares of DASH finished up over 16% during the month. Longer term, Morningstar expects international opportunities, increased penetration in new verticals such as grocery, and an uptick in advertising sales to support top-line growth for DASH.
Also contributing to the SMID Moat Index’s performance in August was the wide moat healthcare information services company Veeva Systems (VEEV). Veeva is the leading provider of cloud-based software solutions tailored to the life sciences industry. It provides an ecosystem of products to address the operating challenges and regulatory requirements that companies in the space face. Veeva reported solid second-quarter results that came in above expectations with the firm demonstrating strong performance throughout the customer size spectrum with wins from both large pharmas and small biotech, sending shares up 12% during the month. Despite this rise, Morningstar’s estimate of fair value for VEEV is $273 per share, indicating upside potential remains.
Names that detracted most from SMID Moat Index performance during the month include the specialty industrial machinery company Chart Industries (GTLS), home fragrance and body care retailer Bath & Body Works (BBWI), alternative asset manager The Carlyle Group (CG), drug discovery and development services company Charles River Laboratories (CRL), and regional automobile dealership Asbury Automotive Group (ABG).
Top Contributors and Detractors from SMID Moat Index - August 2024
Leading Contributors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| DoorDash Inc | DASH | Communication Services | 1.13 | 0.18 |
| Veeva Systems Inc | VEEV | Healthcare | 1.16 | 0.15 |
| WEC Energy Group | WEC | Utilities | 1.39 | 0.13 |
| Lithia Motors Inc | LAD | Consumer Cyclical | 1.25 | 0.11 |
| Global Payments Inc | GPN | Industrials | 1.23 | 0.11 |
Leading Detractors
| Company | Ticker | Sector | Avg. Weight (%) | Contribution (%) |
| Chart Industries Inc | GTLS | Industrials | 1.49 | -0.36 |
| Bath & Body Works Inc | BBWI | Consumer Cyclical | 1.17 | -0.18 |
| The Carlyle Group Inc | CG | Financial Services | 0.79 | -0.15 |
| Charles River Laboratories Int. | CRL | Healthcare | 0.73 | -0.14 |
| Asbury Automotive Group | ABG | Consumer Cyclical | 1.58 | -0.14 |
Source: Morningstar, August 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.
Choose Your Moat Strategy
VanEck’s suite of moat investing strategies is powered by Morningstar’s equity research team, which seeks quality companies trading at attractive valuations. The below ETFs offer access to the moat companies:
VanEck Morningstar US Wide Moat UCITS ETF (MOTU): companies with a wide moat rating, which means Morningstar believes the company is likely to sustain its competitive advantage for at least the next 20 years.
VanEck Morningstar US Sustainable Wide Moat UCITS ETF (MOAT): US wide moat rated companies that passed ESG screens.
VanEck Morningstar US SMID Moat UCITS ETF (SMOT): small and mid-cap moat rated companies.
VanEck Morningstar Global Wide Moat UCITS ETF (GOAT): global wide moat rated companies.
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IMPORTANT INFORMATION
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions.
This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited 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.
VanEck Asset Management B.V., the management company of VanEck Morningstar US Wide 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 US ESG 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.
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.
The Morningstar® Wide Moat Focus IndexSM are service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck Morningstar US Wide Moat UCITS ETF (the “ETF”) is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETF.
Morningstar® US Small-Mid Cap Moat Focus IndexSM are service marks of Morningstar, Inc. and have been licensed for use for certain purposes by VanEck. VanEck Morningstar US SMID Moat UCITS ETF (the “ETF”) is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in the ETF.
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Important Disclosure
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions.
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions. This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited 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.
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 can be obtained free of charge at www.vaneck.com, from the local information agent Computershare Investor Services PLC or from the Management Company.
Morningstar® US Sustainability Moat Focus Index is a trade mark of Morningstar Inc. and has been licensed for use for certain purposes by VanEck. VanEck Morningstar US Sustainable Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in VanEck Morningstar US Sustainable Wide Moat UCITS ETF.
Effective December 17, 2021 the Morningstar® Wide Moat Focus IndexTM has been replaced with the Morningstar® US Sustainability Moat Focus Index.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover and longer holding periods for index constituents than under the rules in effect prior to this date.
It is not possible to invest directly in an index.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck Securities UK Limited
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