The legendary investor Warren Buffett – chair and CEO of Berkshire Hathaway Inc (NYSE: BRK.A)(NYSE: BRK.B) – is famous for his coinage of the term 'moat'.
He explained his criteria for a moat as follows in his 2007 annual letter to the shareholders of Berkshire Hathaway:
It's better to have a part interest in the Hope Diamond than to own all of a rhinestone. A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns.
Therefore a formidable barrier such as a company's being the low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with 'roman candles', companies whose moats proved illusory and were soon crossed.
Now, not to disparage the talents of any readers out there, but Buffett is an investor of the 'one-of-a-kind' variety. It's easy to sit there and come up with a list of businesses that you might see as possessing such a moat. It's harder though to come up with an annual return in one's share portfolio exceeding 20% per annum for decades on end (as Buffett has done).
Thus, one option to consider in Buffett's stead today is the VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT).
MOATs all round
MOAT is an exchange-traded fund (ETF) that sits on our own ASX. However, it is an ETF that only invests in US shares. Not just any US shares though. MOAT tracks an index constructed by Morningstar, which holds only shares that it sees as possessing the kind of competitive advantages that Buffett describes above.
In determining the presence of a 'moat', Morningstar considers 5 sources of sustainable competitive advantage: intangible assets (for example, brands or intellectual property), switching costs, network effect, cost advantage and efficient scale.
At the present time, MOAT holds 48 stocks and charges a management fee of 0.49% per annum. Amongst this ETF's current portfolio are companies like Tiffany & Co (NYSE: TIF), Microsoft Corporation (NASDAQ: MSFT), Amazon.com Inc (NASDAQ: AMZN), Kellogg Company (NYSE: K), Harley Davidson Inc (NYSE: HOG), American Express Co (NYSE: AXP), and Coca-Cola Co (NYSE: KO). You might recognise those last 2 companies from the names Buffett lists above.
All of these companies evidently fit into Morningstar's definition of having a moat, for various reasons. Think about the brands that companies like Kellogg, Harley Davidson and Tiffany have. Or the costs of switching away from Microsoft's Windows and Office products. Or the scale of Amazon.
MOAT is currently rated as a 'buy' by the Motley Fool's flagship Share Advisor service. Scott Phillips and the Share Advisor team like MOAT's international exposure, the diversification it brings to the table, as well as the "exposure to Buffettesque businesses at a good price".
