Wednesday, January 28, 2009

Morningstar's 2008 Performance

Our performance through the midst of the historic events that shaped the past year was mixed. While our 5-star calls [marginally] outperformed the S&P 500, losses greater than 30% are still painful on an absolute basis.

What stands out in 2008 is the huge divergence between the performance of wide-moat stocks and no-moat stocks. Investors rewarded quality companies. Wide-moat stocks returned -22% in 2008 compared with -34% for narrow-moat stocks and -42% for no-moat stocks.

It's also helpful to look at the performance of our star "buckets," which are constructed similarly to our strategies shown on the previous page. For example, the 5-Star bucket can be thought of as a Buy at 5, Sell at 4, 3, 2, or 1 strategy. In 2008, stocks we rated at 5 stars significantly outperformed stocks we rated 1 star as well as the S&P 500, and the three intermediate buckets also lined up as we would hope. This holds true for our trailing five-year performance as well.

While our strategies and buckets may show outperformance, they are not what we would consider investable strategies (given the number of stocks involved). We run a number of actively managed portfolios, such as the Tortoise and Hare that appear in Morningstar StockInvestor, and the Dividend Builder and Dividend Harvest that appear in Morningstar DividendInvestor. These portfolios are real-world examples of our research in practice. In addition, our Wide Moat Focus Index $MWMFT tracks the 20 cheapest wide-moat stocks in our coverage universe. Each of these portfolios has outperformed over the past year, and they are all beating the S&P 500 over their available trailing two-, three-, four-, and five-year time periods as well.

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