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Fund Spy

The Risk of 'Quality'

Don't drown in your portfolio's wide moat.

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Last month, we took a look at "invisible" risk factors and concluded that many investors likely have exposures they're not aware of. Nearly 50% of the S&P 500's underlying revenue comes from abroad, for example, and many of us probably have little insight into how much "moat" risk we run.

The moat risk factor, however, runs both ways. Stocking a portfolio with companies that sport competitive advantages, or a moat--one of the key attributes that generally constitutes investment "quality"--sounds like a permanently perfect strategy. In reality, it's a perfectly temporal one--a recipe for success in some market environments, not so much in others.

Sinking in Moats: A Tale of Two Funds
Morningstar's equity analysts assign moat ratings to 2,000 stocks. Mapping those ratings to the universe of mutual funds, our research finds that--true to its name-- GMO Quality III  (GQETX) resides among the "moatiest" of large-cap funds. Interestingly, so does Vice (VICEX), an overpriced offering with a unique marketing angle: It invests in so-called sin stocks.

Shannon Zimmerman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.