Morningstar Magazine - August/September 2017 - 30

Spotlight: Moats

EXHIBIT 3

Sector Impacts
The Wide Moat Focus Index has
favored the financials sector
and avoided the energy sector
relative to the Morningstar US
Market Index.

Relative Rescaled Weight +/- (%)
r Basic Materials

0.62

i Communication Services

-190.33

-2.22

-194.71

t Consumer Cyclical

2.84

-165.15

-1.62

s Consumer Defensive
o Energy

-227.51

-6.13

-251.64
6.71

y Financial Services
Source: Morningstar. All data 10/01/2002-12/31/2016.
Benchmark: Morningstar US Market Index.

2.48

-32.38

u Real Estate

0.73

-302.07

a Technology

-3.50

f Utilities

-1.26

-4

850.91
-341.43

0

its total return with those of the Wide Moat
Index, the Morningstar US Market Index, and the
S&P 500. A hypothetical $10,000 investment
in the Wide Moat Focus Index in October 2002
would have grown more than sevenfold by
the end of 2016. The same investment in the S&P
500 or Morningstar US Market Index would
have grown to less than $40,000.
Style Characteristics

The Wide Moat Focus Index generally skewed
toward large-cap stocks over the past decade, as
our wide-moat stocks tended to have larger market
caps. However, no significant style bias toward
either value or growth is observed. More than 90%
of the time, the index operated in the core section
of the Morningstar Style Box.
Over the past decade, large-cap stocks typically
accounted for most of the index holdings.
Besides in early 2009, large-cap wide-moat stocks
constituted the index's main holdings. This is
consistent with our coverage universe, as
large-cap stocks account for roughly two thirds
of the wide-moat stocks we cover.

shows the strong performance of
the Wide Moat Focus Index over time, comparing

The high concentration of large-cap stocks with
wide moat ratings is attributable to a couple

1 Zephyr Associates, Inc. (2013). Zephyr StatFACTS: Information Ratio.
2 Grinold, Richard C., and Ronald N. Kahn (2000). Active Portfolio Management.
3 Goodwin, Thomas H. (2009). The Information Ratio.

30

Morningstar August/September 2017

212.95

p Industrials

Upside and downside capture ratios also
paint an attractive picture of relative performance
during volatile markets. The Wide Moat Focus
Index has risen 14% more when the benchmark is
generally rising, yet it has fallen about 5%
less when the benchmark is falling.
EXHIBIT 4

438.83

1.36

d Healthcare

-8

risk profile was well compensated, as
demonstrated by higher Sharpe and Sortino
ratios. The Wide Moat Focus Index has
registered an information ratio of 0.52 since its
October 2002 inception. A recent study that
considers the performance of 230 actively
managed U.S. large-cap equity funds over 10 years
would place the Wide Moat Focus Index just
outside the fifth percentile, which was defined
at an information ratio of 0.54.1 Grinold and
Kahn, who have published multiple studies
evaluating active portfolio management,
determined that top-quartile active equity fund
managers generally have information ratios
of 0.5 or higher.2 In a different study, Goodwin
asserted that, over a 10-year period, very
few long-only active managers have sustained an
information ratio of 0.5 or higher.3

Relative Return +/- (%)

4

8

-500

0

500

1000

of key factors. First, two economic moat
sources that we've identified-cost advantage
and network effects-often benefit from
companies with a large operational scale.
Intangible assets, such as brands or patents, and
high customer switching costs also tend to
disproportionately accrue to larger firms.
Second, companies with economic moats tend to
outlast and earn more compelling returns than
competitors, leading to a survivorship bias across
our coverage.
The Wide Moat Focus Index exhibited a slightly
higher exposure to growth stocks than the
Morningstar US Market Index. Over the past
decade, the Wide Moat Focus Index had a
36% weighting to stocks in the growth category
and a 31% weighting to stocks in the value
category. Since inception across the broader
market, value has slightly outperformed
growth, so the index overweight toward growth
stocks likely provided a modest headwind
for performance.
The overweight to large- and mid-cap stocks
is also relatively modest. The Wide
Moat Focus Index has been roughly 3% overweight



Table of Contents for the Digital Edition of Morningstar Magazine - August/September 2017

Contents
Morningstar Magazine - August/September 2017 - Cover1
Morningstar Magazine - August/September 2017 - Cover2
Morningstar Magazine - August/September 2017 - 1
Morningstar Magazine - August/September 2017 - 2
Morningstar Magazine - August/September 2017 - Contents
Morningstar Magazine - August/September 2017 - 4
Morningstar Magazine - August/September 2017 - 5
Morningstar Magazine - August/September 2017 - 6
Morningstar Magazine - August/September 2017 - 7
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Morningstar Magazine - August/September 2017 - Cover3
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Morningstar Magazine - August/September 2017 - Cover1I
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