What is an economic moat? It’s a representation of a company’s sustainable competitive advantage, which matters because wide moat companies, whose competitive advantages are expected to be durable over the long term, have historically outperformed.
Wide Moat, Wide Outperformance
• Over the last several time periods,the Morningstar Wide Moat Index outperformed the S&P 500 and the corresponding index for companies with no moat.
• According to Morningstar, there are five factors in determining a moat: switching costs (impediments that prevent customers from switching from one product to another), the network effect (the value of the product increases as more people use it), intangible assets (brand identity, government licenses and patents), cost advantage (producing goods at a lower cost than competitors) and efficient scale (average unit cost declines as production volume increases).
• A wide moat has historically meant higher returns. Picking a fund manager who identifies sustainable competitive advantages resulting in wide moats as a key part of his or her investment process may offer potential benefits.
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