Performance data quoted represents past performance. Sizeable Market Declines Have, on Average, Preceded Excess Returns While not every period in the study features outperformance, on average the index has a track record of success. Even more impressive is that average excess returns relative to the broad market in periods following months in which the market is down more than 5% were even more pronounced. As evidenced by the paper, Morningstar’s regular assessment of valuation dislocations has contributed to the Morningstar Wide Moat Focus Index’s impressive average excess returns relative to the broad market in periods following a month of any market return profile. This is where valuations may make a difference. Investing in wide moat companies alone hasn’t always generated excess returns relative to the broad market as measured by the Morningstar US Market Index and has even underperformed the market in some instances. Identifying when these well-positioned companies’ share prices are trading below fair value and then allocating at attractive entry points can make the difference between outperformance and underperformance. That is what makes valuation research so important. So popular, particularly in times of uncertainty, that demand for these companies can drive share prices higher relative to those companies that lack a discernible economic moat. Investing in companies with sustainable competitive advantages, or wide economic moats, is a popular investing strategy. Focus on Valuations Has Driven Outperformance versus Broad Market The strategy’s March 2020 index review coincided with one such period, and we’re tracking the dynamics of many of the companies selected for inclusion at that time, including Boeing (BA), Bank of America (BAC) and Constellation Brands Inc (CTZ). I’ve often written of the long-term nature of Morningstar’s moat investing philosophy, and this piece hammers home the potential benefits of the strategy’s systematic focus on valuations. Morningstar strategist Andrew Lane recently published a research paper examining the performance of the Morningstar ® Wide Moat Focus Index TM in periods following market drawdowns.
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