Value enjoys return to the spotlight in Wide Moat form

Brandon Rakszawski, VanEck

Value investing is under the spotlight already this year, having spent some five to 10 years in the doldrums, outshone by its glamorous growth cousin. Brandon Rakszawski (pictured), Senior ETF Product Manager at VanEck, has noted that November 2020 saw the Morningstar Wide Moat Focus Index come back strongly relative to the S&P 500 Index to erase a good portion of its 2020 relative underperformance. 

This was an interesting rebound as every one of the top 10 performing stocks in the Index in November were classified as either value or core stocks by Morningstar on November 30, Rakszawski says.

The Index posted a 15.01 per cent return for the month of November, versus 10.95 per cent for the S&P 500.

“We don’t offer typical value focused strategies at VanEck,” Rakszawski says. “We tend to focus on strategies that consider valuations but are not limited to pure value-oriented securities.”

The Morningstar Wide Moat Index is focused on valuations, not quite specifically value as a factor, looking at attractively priced companies with sustainable competitive advantages.

“We have seen a bit of a comeback of value-oriented stocks as of late,” Rakszawski says. “It’s a unique dynamic that we haven’t seen for a while.”

He defines the wide moat strategy as a US equity strategy that is agnostic to style but heavily focused on valuations. “It’s a way to look at identifying companies that appear undervalued and have the potential to reach their full market potential. It is unique in that it combines great companies with competitive advantages but also identifies which of those are undervalued. Traditional value metrics don’t necessarily come into play because this strategy is considering Morningstar’s forecasted future cash flow.”

Raksawski writes that a large portion of underperformance in 2020 was driven by poor relative returns in the summer months following the index’s shift toward oversold core and value-oriented stocks. 

“Those moves were finally rewarded in November, after the US presidential election, as value stocks began to starkly outpace growth-oriented stocks.”

A consistent theme of the last several years for the Index has been an underweight to tech stocks but tech was actually the strongest contributor to the Index’s November return. Four of the top 10 contributors to the Index performance came from the tech sector, from tech stocks that aren’t necessarily discussed at length on cable financial news each day, Rakszawski notes.

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