The Morningstar Wide Moat Focus Index displayed the defensive characteristics of its methodology, with Lockheed Martin and Corteva among the standout contributors in February.
The Morningstar® Wide Moat Focus IndexSM (the “Moat Index” or “Index”) continued its trend of offering downside protection thus far in 2022 relative to the S&P 500 Index. The Moat Index posted a loss of -1.11% in February, less than half of the S&P 500’s loss of -2.99%. The Index expanded its excess return to 4.66% for the year to date period. Notably, the Index also outpaced both the Russell 1000 Growth Index (-4.25%) and Russell 1000 Value Index (-1.16%) in February.
This is not the first time the Moat Index has displayed its defensive characteristics. In late 2018, as U.S. markets reacted to a breakdown in U.S./China trade talks and a sell-off in tech, the Moat Index held its own by outperforming the S&P 500 Index in the fourth quarter of that year (-10.25% vs. -13.52%, respectively). The Index would finish 2018 with a modest loss of -0.74% compared to the S&P 500 Index’s return of -4.38%. At the end of that year, the Moat Index dialed up exposure to several oversold industries, including chip companies, which contributed in large part to a strong recovery year in 2019.
2008 was another standout year for the Moat Index. Shortly after the Index went live, the global financial crisis struck. The Moat Index’s focus on companies with competitive advantages and attractive valuations allowed it to outpace the S&P 500 Index handily during that tumultuous year (-19.58% vs. -37.00%). Perhaps equally as impressive, the Index’s positioning throughout 2008 allowed it to recover quickly and outpace the S&P 500 Index by more than 20% in 2009. It is worth noting that while the Index was live at the time, it was before its 2016 methodology enhancements, which expanded the number of index holdings and reduced the impact any single stock could have on the portfolio.
While not inherently a low volatility or defensive strategy, the Moat Index’s combination of wide economic moats and attractive valuations has served the Index well through various difficult market periods.
|Trade Breakdown||Global Financial Crisis||Inflation and Geopolitical Conflict|
|4Q 2018||2019||2008||2009||YTD 2022|
|S&P 500 Index||-13.52||31.49||-37.00||26.46||-8.01|
Source: Morningstar. Data represents index total return. YTD returns as of 2/28/2022.
Index performance is not illustrative of Fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com or by calling 800.826.2333. Past performance is no guarantee of future results. Indexes are unmanaged and are not securities in which an investment can be made. 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.
Lockheed Martin (LMT)
Defense contractors have been prominent in the Moat Index since March of 2020, with Lockheed, Boeing (BA), and Raytheon (RTX) finding their way into the Index due to attractive valuations. A highly competitive industry with large government clients, it would be logical to assume moat stocks are hard to come by. However, Morningstar explains that they exist because of intangible assets—including product complexity that thwarts new entrants, contract structures that reduce risk for the contractor, decades-long product cycles and a lack of alternative suppliers—and the switching costs of a risk-averse customer facing a significant time investment to switch over products.
Lockheed Martin contributed strongly to Moat Index returns in February (Raytheon as well, though with a lower weighting, its total returns effect was slightly less). With the situation in Ukraine, many governments have announced increased defense budgets. Germany and Japan were standouts in that regard, boosting spending to levels not seen in many decades. This drove Lockheed higher at the end of the month.
Morningstar has not yet adjusted its fair value estimate to reflect higher defense budgets. It is awaiting news on the United States’ proposed defense spending for the fiscal 2023 to do so. Morningstar raised Lockheed’s fair value estimate to $419 per share from $402 in late January, but that move was to reflect the dwindling prospects for a corporate tax hike. At the end of February, Lockheed was trading at a premium to Morningstar’s fair value estimate.
Corteva reported fourth quarter results at the beginning of February, and operating EBITDA was up 11% year on year. Its share price appreciated steadily throughout the year. Morningstar indicated that price increases outweighed cost inflation and the company sold a greater proportion of higher-margin, premium products. All of that reinforced Morningstar’s thesis that the company would sell a greater proportion of premium seed and crop protection products over time and that would drive profit growth.
Morningstar awards Corteva a wide economic moat rating based on the company’s portfolio of patented biotech seeds and crop chemicals. According to Morningstar, its patented products command pricing power and its intangible assets stem from its R&D spending.
Shares of Corteva finished the month just shy of Morningstar’s fair value estimate of $52 per share.
Meta Platforms (FB)
On the downside, Facebook parent Meta Platforms was the leading detractor from both absolute Moat Index performance and performance relative to the S&P 500 Index. The company reported quarterly results after the close of markets on February 2, sending shares into a freefall on February 3. According to Morningstar, revenue was slightly ahead of expectations, but the firm missed on the bottom line due to higher investments in not only the Reality Labs metaverse segment but also in Reels and in overall improvement of its advertising back-end. Its first quarter 2022 revenue guidance was also below consensus estimates.
Morningstar reduced its fair value estimate for Meta slightly from $404 per share to $400, but stated that they do not think the market’s reaction was warranted. Morningstar believes wide-moat Meta’s shares now present an attractive investment opportunity, with its share price at approximately 50% of Morningstar’s fair value at the end of February.
Source for all data unless otherwise noted: Morningstar.
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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.
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