- Warren Buffet’s “economic moat” idea sparked its own index and ETF.
- The fund is decided by committee and has performed well since it’s inception.
In a 1999 interview with Fortune, legendary investor Warren Buffett coined the term “economic moats” to sum up the main pillar of his investing strategy. He described it like this:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
The idea of an economic moat, with Buffett’s endorsement, has picked up steam since the article. Morningstar, an investment research firm, created an index that tracks companies with a wide economic moat in order to see if Buffett’s theory holds water. In 2012, VanEck, a money manager, created an exchange-traded fund called “MOAT” that would track Morning Star’s economic moat index.
“Moats were built around castles to protect the castles from enemies, keep intruders out, and the same can be applied to business, where a moat can be built around a business to protect its profitability,” Brandon Rakszawski, ETF Product Manager at VanEck told Business Insider in a phone interview. “[The MOAT ETF] essentially captures Morningstar’s core equity research produced by over 100 analysts and packages that research on a quarterly basis.”
MOAT has performed well so far, with a year-to-date return of 22.31%. The S&P 500 has grown just 13.21% in comparison. Since the fund’s inception in 2012, it has grown an average of 13.73% per year, while the S&P 500 has returned 12.02% per year in the same time period.
The fund is comprised of many household names like Wells Fargo, Lowes, Amazon and Starbucks. The fund readjusts its holding on a quarterly basis and weights those holdings based on Morningstar’s moat ratings, which are decided in a sort of tribunal-like fashion.
Morningstar analysts meet for a “moat committee” meeting at least once a week, according to Rakszawski. The committee is comprised of 20 senior analysts, some of which have sector specialties. Junior analysts present research on their companies to the committee, which either accepts the analyst’s research or asks them to go back for further analysis.
The committee ultimate decides on a specific moat rating for the companies it reviews. Some companies are determined to have no moat and are mostly ignored for VanEck’s ETF. Companies that are determined to have a moat are classified as having either a narrow or wide moat, depending on the length of time the company is expected to be able to maintain its advantage. The threshold for a wide moat rating is 20 years, according to Rakszawski.
Rakszawski says the process is very intensive and rigorous, which results in high-conviction, forward-looking ratings. It can also result in some pretty interesting results.
“Facebook was a good example. In the year or so since the IPO at Facebook, the company entered [the fund] at an attractive time, and subsequently did pretty well,” Rakszawski said. It has since been in and out of the fund because of the fast-paced nature of its sector.
The fund currently sits at $1.3 billion, making it one of the largest 250 US Equity funds, according to data from Bloomberg.
Since the fund started, Warren Buffett’s Berkshire Hathaway, where the CEO executes his own investment ideas, is up 17.04% per year. Compared to MOAT’s 13.7% average annual return and the S&P 500’s 12%, it would seem that investing with a moat mindset might only get you close to the legendary investor’s returns.