One of the more frustrating aspects of being an investment manager is that markets can outlast your convictions far longer than you can endure the pain of losses. The past three years have been that kind of period. Watching portfolio holdings that generate high free cash flow margins, high returns on capital, and continue to grow market size lag behind anything associated with artificial intelligence is very difficult. These underperformers are all companies with deep competitive advantages that value investors like to call wide moats.
So, why aren’t these wide-moat stocks holding up better? It’s a question we've had since 2024, and it intensified in the first quarter of 2026. During that period, the broad US stock market declined by more than 4% and many high-quality, competitively advantaged companies, as defined by the Morningstar Economic Moat Rating, fell even further.
These stocks underperformed when one might expect a move toward quality, driven by worries about higher interest rates or a collapse in the AI story, to make their attributes a welcome haven. But they have not proven to be a sight for sore eyes. Rather, the exact opposite.
What Is a Moat?
Since I began my career as an investment advisor, I have religiously followed the idea of investing in companies with deep competitive moats. First articulated by Warren Buffett, the concept is that, much like a medieval lord, the most important assets can be protected by digging a moat around a castle, thereby preventing a rival from easily capturing his/her home ground. The deeper and wider the moat, the better the protection. Buffett’s concept was no different for corporations. By digging a competitive or economic moat, a company can prevent competitors from stealing market share, cracking a technological advantage, or forcing economic changes that drive down margins or profits.
At Nintai, we see moats providing both defensive and offensive advantages. For instance, a pharmaceutical company might dig a deep competitive moat by securing patent protection for a new therapeutic drug (a defensive moat). At the same time, these patents provide the company with a jumping-off point to greatly expand the
company’s reach within a specific therapy class, such as Type 2 diabetes (an offensive-oriented moat).
Morningstar (MORN) has led the way in making moats an integral part of valuing potential investments. Here’s what they say.
“Morningstar analysts assign every company they cover a Morningstar Economic Moat Rating of wide, narrow, or none. A company whose competitive advantages we expect to last more than 20 years has a wide moat. One that can fend off its rivals for 10 years has a narrow moat. A firm with no advantage, or one we think will quickly dissipate, has no moat. Morningstar has identified five sources that create economic moats:
A company that can hold off competitors from advancing their own products and has deeply embedded itself in its customers’ operations should be able to outperform those competitors. You would think – all other things being equal – that a basket of companies with wide competitive moats would outperform a similar basket filled with a blend of wide, narrow, and no-moat companies.
But since 2021, that hasn't been the case. According to Morningstar, the Wide-Moat Index has underperformed the broader US Market Index, and it’s not even close. Over the trailing three-year period, the US Market Index outperformed the Wide-Moat Index by 9.39 percentage points, with returns of 20.48% versus 11.09%. A major driver of
this underperformance was the 35% annual returns generated by no-moat semiconductors. It doesn’t improve over a trailing five-year period. Over that period, the US Market Index outperformed the Wide-Moat Index by 12.45% to 8.86%, a 3.59% gap. At Nintai, we’ve seen similar returns, with our portfolio holdings having the widest moats, significantly underperforming the S&P 500.
So, what gives? Is there a plausible explanation for this extended period of underperformance, or is it just bad luck? Is our ability to define, measure, and identify outstanding companies suddenly deeply impaired? Have we lost our mojo?
Looking back, two main reasons explain why the wide-moat cohort has performed so poorly relative to its no-moat cousins. First, nearly all the truly outstanding returns over the past three years have come from the artificial intelligence (AI) space, where nearly 80% of the stocks are narrow or no-moat. That makes sense, since it is extremely difficult to model how these companies’ return on capital will exceed their cost of capital over the next decade or two. Second, nearly all the huge gains (not just AI) have been concentrated in the technology space. Entire industries – energy, consumer defensives, healthcare, etc. – have lagged tremendously over the past three to five years. It’s impossible to tell when this remarkable concentration of returns might disperse, but for now it continues along the same path. Since Nintai doesn’t invest in many AI technology companies, our portfolios have lagged the Morningstar Wide-Moat Index in the same way since 2021.
In the past quarter, we’ve seen wide-moat companies break out from their slump and handily beat their narrow and no-moat competitors. Will it continue and replicate the performance during the 2016-2020 bull market? We have no idea, but we like our chances. Until then, we will continue investing the only way we know: high-quality companies with deep competitive advantages and rock-solid financials.
I look forward to your thoughts and comments.
DISCLOSURE: None
So, why aren’t these wide-moat stocks holding up better? It’s a question we've had since 2024, and it intensified in the first quarter of 2026. During that period, the broad US stock market declined by more than 4% and many high-quality, competitively advantaged companies, as defined by the Morningstar Economic Moat Rating, fell even further.
These stocks underperformed when one might expect a move toward quality, driven by worries about higher interest rates or a collapse in the AI story, to make their attributes a welcome haven. But they have not proven to be a sight for sore eyes. Rather, the exact opposite.
What Is a Moat?
Since I began my career as an investment advisor, I have religiously followed the idea of investing in companies with deep competitive moats. First articulated by Warren Buffett, the concept is that, much like a medieval lord, the most important assets can be protected by digging a moat around a castle, thereby preventing a rival from easily capturing his/her home ground. The deeper and wider the moat, the better the protection. Buffett’s concept was no different for corporations. By digging a competitive or economic moat, a company can prevent competitors from stealing market share, cracking a technological advantage, or forcing economic changes that drive down margins or profits.
At Nintai, we see moats providing both defensive and offensive advantages. For instance, a pharmaceutical company might dig a deep competitive moat by securing patent protection for a new therapeutic drug (a defensive moat). At the same time, these patents provide the company with a jumping-off point to greatly expand the
company’s reach within a specific therapy class, such as Type 2 diabetes (an offensive-oriented moat).
Morningstar (MORN) has led the way in making moats an integral part of valuing potential investments. Here’s what they say.
“Morningstar analysts assign every company they cover a Morningstar Economic Moat Rating of wide, narrow, or none. A company whose competitive advantages we expect to last more than 20 years has a wide moat. One that can fend off its rivals for 10 years has a narrow moat. A firm with no advantage, or one we think will quickly dissipate, has no moat. Morningstar has identified five sources that create economic moats:
- Network effect occurs when the value of a company’s service increases for both new and existing users as more people use the service.
- Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company’s products or allow the company to charge higher prices.
- Firms with a structural cost advantage can either undercut competitors on price while earning similar margins, or they can charge market-level prices while earning relatively high margins.
- When it would be too expensive or troublesome to stop using a company’s products, these switching costs indicate pricing power.
- When a niche market is effectively served by one or only a handful of companies, efficient scale may be present.”
A company that can hold off competitors from advancing their own products and has deeply embedded itself in its customers’ operations should be able to outperform those competitors. You would think – all other things being equal – that a basket of companies with wide competitive moats would outperform a similar basket filled with a blend of wide, narrow, and no-moat companies.
But since 2021, that hasn't been the case. According to Morningstar, the Wide-Moat Index has underperformed the broader US Market Index, and it’s not even close. Over the trailing three-year period, the US Market Index outperformed the Wide-Moat Index by 9.39 percentage points, with returns of 20.48% versus 11.09%. A major driver of
this underperformance was the 35% annual returns generated by no-moat semiconductors. It doesn’t improve over a trailing five-year period. Over that period, the US Market Index outperformed the Wide-Moat Index by 12.45% to 8.86%, a 3.59% gap. At Nintai, we’ve seen similar returns, with our portfolio holdings having the widest moats, significantly underperforming the S&P 500.
So, what gives? Is there a plausible explanation for this extended period of underperformance, or is it just bad luck? Is our ability to define, measure, and identify outstanding companies suddenly deeply impaired? Have we lost our mojo?
Looking back, two main reasons explain why the wide-moat cohort has performed so poorly relative to its no-moat cousins. First, nearly all the truly outstanding returns over the past three years have come from the artificial intelligence (AI) space, where nearly 80% of the stocks are narrow or no-moat. That makes sense, since it is extremely difficult to model how these companies’ return on capital will exceed their cost of capital over the next decade or two. Second, nearly all the huge gains (not just AI) have been concentrated in the technology space. Entire industries – energy, consumer defensives, healthcare, etc. – have lagged tremendously over the past three to five years. It’s impossible to tell when this remarkable concentration of returns might disperse, but for now it continues along the same path. Since Nintai doesn’t invest in many AI technology companies, our portfolios have lagged the Morningstar Wide-Moat Index in the same way since 2021.
In the past quarter, we’ve seen wide-moat companies break out from their slump and handily beat their narrow and no-moat competitors. Will it continue and replicate the performance during the 2016-2020 bull market? We have no idea, but we like our chances. Until then, we will continue investing the only way we know: high-quality companies with deep competitive advantages and rock-solid financials.
I look forward to your thoughts and comments.
DISCLOSURE: None
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