Solactive has published its latest white paper on Economic Moat, which explores a rules-based approach to select companies with lasting competitive advantages.
In the paper, Solactive presents the Solactive Systematic Moat Index concept, described as an alternative way for quality investing. The company writes that this strategy falls under the Solactive Intuitive Beta family, ‘an investing approach relying on intuition and gut feeling as a starting point’.
The paper finds that the fundamental structure of a competitive advantage consists of three levels: low cost of production or differentiation power; scalability of the business model; a company’s intellectual properties like franchises, patents, or licenses.
The paper argues that in order to be surrounded by an Economic Moat, companies should maintain their unique selling proposition by means of products or services that lead to high switching costs for customers, and trigger strong network effects.
Timo Pfeiffer, Head of Research at Solactive, says: “Many products on the market are almost utilities in our daily life. Out of convenience, the switching costs to alternatives become high. These big brands establish themselves through a strong network effect – for example, I myself have never used another spreadsheet other than Excel. It is fascinating that these commonalities are captured through our newly launched index concept.”
The index universe consists of 40 stocks having the highest Economic Moat ranking; these securities were systematically added to the index as an Economic Moat with a wide operating margin. Some current index components are: Gilead Sciences, Inc, McDonald's Corporation, Planet Fitness, Inc, Class A, and Oracle Corporation.
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