3 Funds That Covet Wide-Moat Stocks

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. At Morningstar, we're fans of companies that have wide economic moats. Such high-quality firms have competitive advantages that allow them to effectively fight off competitors. Several funds pursue strategies targeting high-quality stocks. Here are three good funds holding substantial positions in wide-moat names.

Tony Thomas: The managers of Mairs & Power Growth aren't your typical go-go growth investors. Their favorite companies offer steady, sustainable growth over time. That often means managers Mark Henneman and Andy Adams are investing in established companies protect by wide moats.

For example, one of the fund's largest holdings, US Bank, enjoys cost advantages and regional dominance. Another top holding, 3M, uses its research prowess to develop new products and protect them with patents, fortifying its numerous competitive advantages. Such advantages don't always show up in financial statements, and the managers often get their best leads looking in their own back yard.

Keen observers will note that US Bank and 3M are based in Minnesota, not far from Mairs & Power's St. Paul offices, and that's no fluke. This level of access helps give the managers the confidence to buy and hold their best picks. This long-term approach built on wide moat companies contributes to the fund's Silver rating.

Robby Greengold: The Polen Growth Fund uses a highly disciplined investment process designed chiefly to protect shareholder capital. Portfolio managers Dan Davidowitz and Damon Ficklin take a long-term perspective as they hunt for financially superior and competitively advantaged businesses.

This is a concentrated portfolio holding only about 20 stocks. The managers are essentially looking to buy the best companies in their investable universe. They like companies with juicy margins, strong organic revenue growth, an immaculate balance sheet. Since they want to own these stocks over the long haul, they want to see wide competitive moats.

What you'll see a lot of in this portfolio are firms benefiting from network effects and possessing high switching costs. Adobe and Microsoft, for example, which have been top holdings recently, arguably fit that profile. What you probably won't see a lot of, or any of, are commodity-like industries, highly levered or highly regulated businesses--so no telecom, no energy, and sparse holdings of financial stocks.

This is a Bronze-rated fund. It's unique, and we continue to have a lot of confidence in it.

Greg Carlson: Jensen Quality Growth is a fund that invests in a lot of wide-moat stocks. Its managers have stringent criteria. They're looking for companies that have generated returns on equity of at least 15% over each of the previous 10 calendar years. That results in a universe of roughly 100 to 200 companies, so it's a pretty narrow investment pool.

These companies tend to be very steady with very little debt and very strong competitive positions. As a result, the fund has one of the highest exposures to wide-moat stocks in the entire large-growth category; it's generally in the top 1%. Over the long term, this has meant muted volatility and excellent risk-adjusted returns, although the fund can lag during big rallies.