Wide-Moat Funds That Fly Under the Radar
These quality funds with smaller asset bases have portfolios built around solid companies.
As regular visitors to Morningstar.com well know, we're big fans of companies with economic moats. In fact, we have an in-house committee devoted to vetting companies for inclusion into this elite club. Only companies with sustainable competitive advantages are granted entry, and these can be achieved in one of five different ways (see this information sheet for some examples).
Although investors mostly think about Morningstar Economic Moat Ratings in relation to individual stocks, the ratings can tell us quite a bit about funds, as well. An equity fund with a high average moat rating typically has a portfolio tilted toward high-quality, stable companies that are unlikely to have their competitive positions shaken anytime soon, whereas funds with a low average moat rating could have the opposite--a good deal of assets invested in companies that may be more vulnerable should economic or sector-specific headwinds arise. Morningstar fund analyst David Kathman discussed how funds with wide moat ratings tend to outperform in bear markets in this article.
Of course, funds with wide moat ratings also may lag during bull markets, especially when more speculative fare is performing well. But investors looking for solid long-term performance and downside protection are advised to take note of how much of a fund's portfolio falls into wide-moat, narrow-moat, and no-moat territory. This information is available to Premium Members by clicking on the Portfolio tab on any fund page and then clicking on the Premium Details link near the top.
Members also can use Morningstar.com's Premium Fund Screener tool to identify equity funds with average moat ratings that fall into the wide range on an asset-weighted basis. (Only funds with at least 50% of their assets in stocks with moat ratings get a fund-level moat rating.) Some of these, such as the Gold-rated
Vanguard Dividend Growth (VDIGX) and Yacktman (YACKX), are already quite familiar to many of our readers. Therefore, we thought we'd call attention to lesser-known moat-stock funds with asset bases of less than $3 billion but with Morningstar Analyst Ratings of Bronze or better. The list includes some funds that may charge a load, but readers can screen them out if they wish. We only included noninstitutional funds currently open to new investors. Premium Members can see the full list here, which includes the following funds.
Bridgeway Blue Chip 35 Index (BRLIX)
| Category: Large Blend | Analyst Rating: Silver | % Wide Moat: 64.1 | Top holdings: Visa (V), IBM (IBM) Cisco Systems (CSCO), Google (GOOG), Microsoft (MSFT)
Investing only in mega-caps, this quantitative fund has the highest average market cap of any mutual fund ($142.5 billion). Stocks are equal-weighted and no more than four are chosen from any one industry. The fund tends to outperform in down markets and lost 33% in 2008, which was still 4 points better than the S&P 500. At only 15 basis points, annual fees are among the lowest you'll find for this kind of exposure to the market's largest firms.
Fidelity Select Consumer Staples (FDFAX)
| Category: Consumer Defensive | Analyst Rating: Bronze | % Wide Moat: 72.5 | Top Holdings: British American Tobacco (BTI), Procter & Gamble (PG) , Coca-Cola (KO), CVS Caremark (CVS), Altria Group (MO)
For investors seeking concentrated exposure to consumer staples companies, this fund's actively managed approach offers some advantages, says Morningstar fund analyst Josh Charlson. Among these is manager Bob Lee, who has been at the helm since 2004. Lee likes firms with a presence in emerging markets, which is one reason British American Tobacco is the fund's largest holding at 15% of the portfolio as of July 31. Charlson points out that consumer staples exposure is available more cheaply from some passively managed funds, though this fund's 0.80% expense ratio still is considered low for a specialty no-load fund.
Tweedy, Browne Value (TWEBX)
| Category: World Stock | Analyst Rating: Silver | % Wide Moat: 56.9 | Top holdings: Roche Holding (ROG), Total (FP), Novartis (NOVN), Johnson & Johnson (JNJ), Nestle (NSRGY)
This fund's experienced management team takes an all-cap approach in seeking out quality companies they can hold for the long term. As of June 30 the portfolio had a slight tilt toward U.S. stocks over foreign stocks, with a 14% cash stake. The fund typically lags during rallies, but it has a low Morningstar Risk rating and performed well when foreign stocks tanked in 2008 and 2011, with returns that beat its category average by 17.5 and 6.2 points, respectively. At 1.39%, expenses are above-average for a no-load, world-stock fund.
Portfolio data as of June 30 for Bridgeway Blue Chip 35 Index and Tweedy, Browne Value; as of July 31 for Fidelity Select Consumer Staples.
Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.