The Takeaway
The Morningstar Wide Moat Focus Index underperformed compared to the broader U.S. equity market by the end of 2021, despite a historically strong Q1
Since going live in 2007, the index has outperformed its benchmark by 282 points annually
While the primary source of outperformance for the index has traditionally been stock selection rather than sector weightings or factor exposures, 2021's selection proved unfavorable.
After historically strong first-quarter performance, the Morningstar Wide Moat Focus Index faltered over the remainder of 2021. When the dust had settled at the end of the year, the index had delivered slight underperformance versus the broader U.S. equity market. However, the strategy's long-term performance remains impressive, having now established a 15-year track record since live inception in February 2022. The index has outperformed its benchmark by 282 basis points annually since it went live in early 2007.
Over the index's long-term track record, stock selection, rather than sector weightings or factor exposures, has been the primary source of outperformance. However, for any strategy that involves the active element of analyst-driven valuation assessments, unfavorable stock selection is certain to rear its head from time to time. This scenario played out in 2021, as stock selection proved unfavorable.
Being underweight "momentum" relative to the benchmark also weighed on excess returns. However, a lower exposure to momentum relative to the benchmark is a structural dynamic that results from the use of a valuation screen. Accordingly, we view this as a "necessary evil" that helps ensure the index consistently trades at a discount to fair value.
An underweight position in Big Tech stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla), also represented a mild performance headwind, as these stocks performed well on average, during the year. Across this group, Alphabet, Amazon, Meta Platforms, and Microsoft were each held by the index for at least a portion of the year, although each was held at a lower relative weighting versus the benchmark.
Although the portfolio has typically operated in the core/blend style category, it has exhibited a value tilt in recent years. This positioning had little impact on relative performance in 2021, as "growth" and "value" yielded similar returns.
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