Morningstar celebrates its 35th anniversary today. In 1984, Morningstar founder Joe Mansueto began a quest to bring some much-needed transparency to the nascent mutual fund industry. He published quarterly "sourcebooks" that gave investors access to data and information that had been heretofore out of reach. Eventually, Morningstar launched its ubiquitous "star rating" for mutual funds, providing a visual representation of risk-adjusted historical return.
Over time, Morningstar began analyzing closed-end funds, variable annuities, ADRs--and eventually, stocks and exchange-traded funds, too. Additional investor-friendly innovations soon followed: the Morningstar Style Box, meaningful fund category comparisons (rather than the prospectus objective), tax-adjusted returns, the Morningstar Rating for stocks, and Morningstar Analyst Ratings, to name just a few.
"We were trying to create on-ramps to investing, to keep it from being this closed-door club where only the initiated few could participate, to something where everyone could make informed and intelligent decisions," explains managing director Don Phillips, who was Morningstar's first mutual fund analyst. (Hear more from Phillips in the latest installment of The Long View, Morningstar's new podcast.)
By bringing an independent voice that focused on clarity, costs, and long-term outcomes, Morningstar helped investors build confidence. To this day, Morningstar's mission is to empower investor success. And that mission continues to motivate the company's longtime employees (like me).
To celebrate, today we're sharing 35 core investment ideas across stocks, funds, and ETFs that epitomize our approach to investing.
6 Undervalued High-Quality Stocks
The first iteration of the Morningstar Rating for stocks debuted in 2001. Since then, the rating has evolved, and supplemental ratings have taken root.
Put simply, our approach to stock investing is to buy shares of great businesses at a discount to their worth. Great companies are those with solid competitive advantages that allow them to earn high returns on capital for years to come. These companies have carved out economic moats stemming from one (or more) of five sources of competitive advantage. We assign wide Morningstar Economic Moat Ratings to companies we expect to outearn their costs of capital for at least 20 years. And we favor companies whose competitive advantages are stable or improving, as encapsulated in our "moat trend" metric.
We value companies by estimating their underlying cash flows. We're therefore looking at a company's fundamental value and where a stock is trading relative to that value--not where the stock is trading relative to its historical price or its competition--when calculating our fair value estimates. Moreover, to assign our Morningstar Rating, we take into account the predictability of a company's future cash flows--the uncertainty rating. A stock with higher uncertainty requires a larger margin of safety before earning a 4- or 5-star rating.
Six stocks pass a pretty high Morningstar bar today--they're all undervalued high-quality names. Specifically, they all carry wide economic moats with stable moat trends, earn low uncertainty ratings, and land in the 4- and 5-star range as of this writing: Enterprise Products Partners (EPD), Pfizer (PFE), Anheuser-Busch InBev (BUD), Dominion Energy (D), Reckitt Benckiser Group (RBGLY), and Roche Holding (RHHBY).
29 Gold-Rated Stock Funds
Unlike the historical Morningstar Rating for funds, the Morningstar Analyst Rating is a forward-looking analysis of a fund's likelihood to outperform. Funds that receive Gold, Silver, or Bronze ratings are expected to outperform over a full market cycle. To arrive at the rating, our analysts examine a fund's costs, its long-term performance, and its investment process, among other factors.
Today, 23 "core" funds and ETFs earn our highest Analyst Rating of Gold. How, specifically, are we defining "core" in this instance? These funds all land in one of the three large-cap U.S. diversified equity categories, do not carry loads, and are open to new investors.
Many of the names on the list are index funds, thanks in large part to their very low costs: Fidelity 500 Index (FXAIX), Fidelity Total Market Index (FSKAX), iShares Core S&P 500 ETF (IVV), iShares Core S&P Total U.S. Stock Market ETF (ITOT), Schwab Total Stock Market Index (SWTSX), Schwab U.S. Broad Market ETF (SCHB), Schwab U.S. Large-Cap ETF (SCHX), Schwab S&P 500 Index (SWPPX), SPDR S&P 500 ETF (SPY), Vanguard Dividend Appreciation ETF (VIG), Vanguard Institutional Index (VINIX), Vanguard Institutional Total Stock Market Index (VITPX), and Vanguard Large-Cap ETF (VV). Note that DFA US Large Company (DFUSX) is available to individual investors only through a qualified financial advisor or select platform such as a 401(k). Vanguard Tax-Managed Capital Appreciation (VTCIX) tracks the Russell 1000 Index but also seeks to minimize tax consequences.
Several of our Gold-rated large-cap funds, however, are actively managed: AMG Yacktman (YACKX), Dodge & Cox Stock (DODGX), FMI Large Cap (FMIHX), Oakmark (OAKMX), Primecap Odyssey Growth (POGRX), Primecap Odyssey Stock (POSKX), T. Rowe Price Blue Chip Growth (TRBCX), and T. Rowe Price Institutional Large-Cap Core Growth (TPLGX). Many would argue that indexing the large-cap part of the market is the way to go. However, the managers of these funds are all well-heeled, fundamentals-focused practitioners who consistently ply successful, thoughtful strategies; these are no index wannabes. Rather, these managers generally concentrate in high-conviction ideas, bravely scoop up companies when they're suffering duress, and own stocks for the long haul. Fees are reasonable, to boot.
Among "core" funds focusing on foreign stocks, five no-load options that are still open to new investors earn Gold ratings. Two of the names are index funds-- iShares Core MSCI Total International Stock ETF (IXUS) and Vanguard FTSE All-World ex-US ETF (VEU). The others-- Oakmark International (OAKIX), Causeway International Value (CIVIX), and American Funds International Growth and Income (IGFFX)--are actively managed. Like their domestic counterparts, these active stock-pickers are willing to go against the grain and maintain portfolios that are unlike their respective indexes. (Also note that the latter fund is available without a load on brokerage platforms like Schwab's.)
To be honest, we're taking a little bit of liberty with our last Gold-rated fund, which brings our total number of investments up to 35 to match Morningstar's years in business. While few would consider Vanguard Health Care (VGHCX) a "core" fund, it is the only sector fund that earns a Gold rating. Quite simply, its consistent (and successful) strategy in a sector rich in innovation and growth--coupled with modest costs--is tough to ignore.
Susan Dziubinski owns shares in the security mentioned above: VINIX.