Investing for the long term is all about ensuring you choose stocks that will remain profitable for years to come. This is what Warren Buffett’s methodology focuses on, as well as many other buy-and-hold investors such as Terry Smith and Nick Train. Such investors say their ideal holding period is "forever", meaning they're on the hunt for businesses that can keep leading their sector for years to come.
At Morningstar we agree, which is why we developed the Economic Moat rating. It indicates how strong a company's competitive advantages are and whether it is likely to keep competitors at bay for an extended period. This can be achieved by having a significant user base, intangible assets such as patents, a cost advantage, high switching costs or efficiencies of scale. And based on how well a company is managing to stay ahead, the wider the moat rating. We use three ratings: none, narrow and wide moats.
But it's not just stock investors who can benefit from Economic Moats. A fund is, after all, a bucket of lots of different stocks. So we looked at the funds with the greatest proportion of moaty stocks in their portfolio.
Natixis Loomis Sayles US Equity Leaders
The Natixis fund has the highest exposure to wide-moat stocks, at 77.21%. Its exposure to stocks with a narrow moat is 21.86%, leaving less than 1% which is currently held in cash. Its top five holdings are Amazon (AMZN), Facebook (FB), NVIDIA (NVDA), Visa (V) and Microsoft (MSFT). Its highest-rated share class holds a Gold-rating as the fund boasts an experienced management and a solid research-based strategy with a focus on quality and growth. It has also seen strong growth over the past years, with a three-year annualised return of 21.67%.
Fundsmith Equity
Fundsmith Equity is the fund with the second-highest allocation to moaty stocks. It holds 1% in stocks with no moat, 2% in cash – and the rest is allocated to stocks with a wide (73.98%) and narrow (22.75%) moat. It is the largest and arguably most famous fund in the UK, managed by Terry Smith, whose strategy revolves around buying and holding high-quality businesses that will continually compound in value. Despite its size, Morningstar’s analysts believe the fund is deserving of a Gold rating as it remains a compelling offering for long-term, benchmark-agnostic investors who can tolerate short-term price risk. The portfolio top fives are PayPal (PYPL), Microsoft, IDEXX Laboratories (IDXX), The Estee Lauder Companies (EL) and Facebook and the fund has grown 16.34% on a three-year annualised basis.
ASI Global Equity
Standard Life Aberdeen, soon to be Abrdn, is going through a change in identity, and while the global equity fund is a reasonable offering, Morningstar’s associate director Andrew Daniels has found that it comes with a few uncertainties – hence a Neutral rating. But, it has the third-largest exposure to wide-moat stocks, with 59.11%. It also holds 26.85% in narrow-moat stocks and has returned 10.84% year-on-year over the past 3 years. It uses a patient bottom-up approach with value and quality in focus and of its 43 holdings, the biggest allocations are to Microsoft, Visa, Alphabet (GOOGL), Taiwan Semiconductor (2330), AIA Group (01299).
BNY Mellon Long-Term Global Equity
Bank of New York Mellon’s long global equity fund is described as a solid long-term global equity option, and most of its share classes hold a Silver rating. The investment team ranks among the best in the industry due to its intense focus on balance sheets and cash flow return. The strategy which favours technology, healthcare and discretionary names, seen across its top holdings Taiwan Semiconductor, Keyence (6861), Adobe (ADBE), Microsoft and Alphabet. It has allocated 58.06% of its assets to stocks with a wide moat, and 30.59% to narrower companies. This has allowed the fund to grow its annualised return 13.72% over three years.
T. Towe Price US Large Cap Growth Equity
Last but not least, the Silver-rated US large growth equity fund from T. Towe Price has the second-highest 3-year annualised return, with 19.09%. Despite having a fairly new management, the fund has shown adaptability, while our analysts believe it will win over time through its stock-picking. The moat stock allocation is 56.83% wide and 32.88% narrow, and as it favours technology, communications and consumer brands, its top stocks are Amazon, Microsoft, Alphabet, Facebook and Apple – a clean sweep for GAFAM.
