I've been listening to the siren song of the value investing philosophy lately. It started with attending a lunch sponsored by the local CFA chapter where the speaker was Pat Dorsey from Morningstar. Then I bought his book and read it. Now I've signed up for the premium membership tools (stock screeners, research reports, etc) over at morningstar.com.
Sometimes I wonder if the main near-term benefit of writing this blog and managing a model portfolio is that it absorbs my free time devoted to the investing hobby such that I end up leaving my own portfolio alone without a bunch of excessive trading.
Anyhow, I wondered whether or not low beta stocks may provide superior returns in part because they overlap with morningstar's notion of economic moats. In short, there seems to be a little connection, but it's not overwhelming. In the chart above, you can see how the 169 stocks in the model portfolio are rated by morningstar in terms of having economic moats (not all 169 stocks are covered). It appears as though the wide moat stocks do indeed exhibit less volatility as measured by standard deviation of returns (beta isn't yet available as a field to screen). Also, it appears the wide moat stocks in the model portfolio are considered by morningstar to trade at a discount to their assessment of fair value. However, this could potentially be caused by morningstar calculating higher fair values for stocks they deem to have wide moats.
At the risk of being rash, I decided to go ahead and tweak the model portfolio just a bit to provide a slight value tilt. I sold nine stocks with no or narrow moats that were deemed to be overvalued 1.5x or more and I bought nine stocks with wide moats that were deemed to be 0.86x or less of fair value (which puts them in top quartile of morningstar's database).
Sales: CHD, EW, BJ, ORLY, ILMN, INFA, PNY, RYAAY, LFL
Purchases: EXC, GE, MDT, NVS, RHHBY, ZMH, WU, AMAT, CSCO
