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ETF.com Expert Webinar Series Europe:
THE POWER OF MOATS
Moderator
Jim Wiandt Founder and President ETF.com
Eduardo Escario Regional Director Business Development & Sales Van Eck Global
Presenters
Alex Morozov Director of European Equity Research Morningstar
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n Van Eck Global is a privately owned investment manager and a leading ETF provider.
n Over 200 full-time staff. Headquartered in New York. Offices in the USA, Asia, Europe and Australia.
n Global clients base including financial intermediaries and over 400 institutions worldwide.
n Total assets under management (AUM) of currently USD 25 billion.
n Offers active and index investments with key focus on hard assets, EM, fixed income, and specialised asset
classes.
n Launched the first Market Vectors ETF in 2006 and the company’s UCITS ETF platform in 2014
n Introduced the first UCITS ETFs in 2015
Van Eck Global: Who We Are
Source: Van Eck Global. Data as of 31 December 2015.
4
Van Eck Global: Investing in Moats
Source: Van Eck Global, FactSet. Data as of 31 December 2015.
n Market Vectors Morningstar US Wide Moat UCITS ETF invests in the 20 most attractively priced companies with a wide moat according to Morningstar.
n Moat = Sustainable competitive advantages.
n In favor of undervalued stocks. 20 stocks with most attractive valuations qualify for index.
n Proven index track record. Index has generate excess returns relative to overall market since its inception.
n ETF is registered in Finland, Germany, Ireland, the Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom.
LISTING CURRENCY TICKER BLOOMBERG SEDOL RIC
London Stock Exchange USD MOAT MOAT LN BYZ9YL8 MOAT.L
Deutsche Börse EUR GMVM GMVM GY BYNZF15 GMVM.DE
SIX Swiss Exchange CHF MOAT MOAT SE BZ1JHM1 GMVMINAV
Inception Date 16.10.2015
AUM USD 2.00M
Base Currency USD
Investment Strategy Full Replicaton
Income Treatment Accumulating
Reviewed Quarterly
Weighting Scheme Equally weighted
TER 0.49%
Domicile Ireland
LISTING CURRENCY TICKER BLOOMBERG SEDOL RIC
London Stock Exchange USD MOAT MOAT LN BYZ9YL8 MOAT.L
Deutsche Börse EUR GMVM GMVM GY BYNZF15 GMVM.DE
SIX Swiss Exchange CHF MOAT MOAT SE BZ1JHM1 GMVMINAV
Inception Date 16.10.2015
AUM USD 2.00M
Base Currency USD
Investment Strategy Full Replicaton
Income Treatment Accumulating
Reviewed Quarterly
Weighting Scheme Equally weighted
TER 0.49%
Domicile Ireland
5
n Factsheet: - Updated monthly
- Fund information
n Website: - Updated daily
- Contains detailed fund and index information
Van Eck Global: Investor Resources
n Calls: - Quarterly review conference calls
- Featuring Morningstar Analysts
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Morningstar® Wide Moat Focus IndexTM is a trade mark of Morningstar Inc. and has been exclusively licensed for use for certain purposes by Van Eck Global. Market Vectors Morningstar US Wide Moat UCITS ETF is not sponsored, endorsed, sold or promoted by Morningstar and Morningstar makes no representation regarding the advisability in Market Vectors Morningstar US Wide Moat UCITS ETF. Van Eck only serves professional clients in countries where the funds are registered or where funds can be sold in accordance with local private placement rules. The professional investor definition is described in the Terms and Conditions on www.marketvectors-europe.com. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. The value of the investments may go up or down and the investor may not get back the amount invested. All data is sourced as at the date stated. Performance data is displayed on a Net Asset Value basis, in Base Currency terms, with net income reinvested, net of fees. Brokerage or transaction fees will apply. Please note that it is not possible to invest directly into an index. Even though the funds may provide an exposure to the asset class represented by the index the investment return of the fund will not accurately track the index. This presentation is advertising and provides certain information about the ETFs referred to in it. The information herein is insufficient to make an investment decision. Before making an investment decision you need to read the sales prospectus and KIIDs. Investors should also consult their tax, financial, legal or other advisors prior to acquiring ETFs to clarify economic and/or tax consequences of an investment into the ETFs. The ETFs are not recommended, sold or advertised by the index manager nor does the index manager provide any other assurances regarding the ETFs and the results that may or may not be achieved through use of the index. Market Vectors Global Investments Ltd. disclaims all liability relating to this presentation and the information contained in it and for any errors or omissions, or for losses of any kind arising from trust placed in the information in any way, subject to the laws and provisions in force. Market Vectors UCITS ETFs plc. is an investment scheme which is registered in Ireland and which, as an umbrella fund, is subject to the European regulation of collective investment schemes under UCITS IV. The sales prospectuses for the Market Vectors UCITS ETFs contain a comprehensive description of the conditions governing the fund. The sales prospectus, the Key Investor Information Document (KIID), the Articles of Association and the current annual and semi-annual reports are available free of charge from the following agents, contact details of whom may be found on www.marketvectors-europe.com. UK: Facilities Agent -- Computershare Investor Services PLC Germany: Information Agent -- Van Eck Global Europe GmbH Spain: Designated Distributor -- Allfunds Bank S.A. Sweden: Paying Agent -- SEB Merchang Banking Switzerland: Representative -- First Independent Fund Services Ltd; Paying Agent -- Neue Helvetische Bank Ltd. Further information is available at www.marketvectors-europe.com Van Eck Global Investments Ltd. is supervised by the Central Bank of Ireland (CBI). Copyright © Van Eck Global Investments Ltd. 2015. All rights reserved.
Important Information
©2015 Morningstar, Inc. All rights reserved.
Morningstar® US Wide Moat Focus Index The Power of Moats
Morningstar’s independent research, operational expertise, and quality data is woven into the global investment landscape.
Morningstar
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Who We Are
3,600+ Employees
27 Offices
8.9 million Investors served worldwide through our global investing websites and publications
100 million+ Investors reached through more than 400 media partners
30+ Global regulators depend on Morningstar data to track financial sector behavior Data as of March 31, 2014
260,000+ Advisors trust Morningstar to serve their clients
Morningstar Equity Research
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Our accomplished team of award-winning analysts apply one consistent valuation methodology across our global coverage universe.
Morningstar Global Analyst Team
Equity and Credit Analysts
Valuation Methodology
▶ Our analysts are specialized and organized by sector
▶ Average coverage per analyst is 16 companies
▶ More than 2/3 of our analysts have either a CFA or MBA, 1/3 have both
▶ 13 Analyst Awards from the Wall Street Journal
▶ 44 new research reports daily
▶ Analysts quoted in media 40 times per day
▶ Discounted cash flow foundation applied to all companies, across all sectors
▶ Economic Moat Committee ensures consistent assignment of Economic Moat™ Rating
Our award-winning analysts rely on a proven methodology
Morningstar Equity Research
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Morningstar’s Research Methodology
Morningstar® Economic Moat™ Rating
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Economic Moat Concept
Ø Capital flows to the areas of highest potential return, so all firms face competition that seeks to force down high returns on capital.
Ø But some firms generate high returns for a very long time. Ø How? By creating economic moats around their businesses.
Ø An economic moat is a structural business characteristic that allows a firm to generate excess economic returns for an extended period. Ø Firms with moats have ability to invest incremental capital at high rates of return
= faster earnings growth and/or higher free cash flow. Ø Firms with moats have more predictable cash flows, limiting the risk.
What is an Economic Moat?
What is NOT an Economic Moat?
Morningstar® Economic Moat™ Rating
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Economic Moat Concept
Ø Size / Dominant Market Share: High market share does not give a firm a moat. (Ask Compaq – or GM.)
Ø Technology: What one smart engineer can invent, another engineer can make even better.
Ø Hot Products: Can generate high returns on capital for a short period of time, but sustainable returns are what make a moat.
Ø Process: Can be imitated with time. Witness Dell.
What about Management?
Morningstar® Economic Moat™ Rating
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Economic Moat Concept
Ø In our view, management is not a moat by itself, but smart (or dumb) managers can create (or destroy) a moat over time.
Ø "Go for a business that any idiot can run – because sooner or later, any idiot probably is going to run it." – Peter Lynch
Ø “When management with a reputation for brilliance tackles a business with a reputation for poor economics, it is the reputation of the business that remains intact.” – Warren Buffett
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g To earn a narrow or wide economic moat rating, a company must have sustainable competitive advantage(s) that allow the firm to generate positive economic profits for the benefit of its owners for an extended period of time.
g Narrow Moat: Excess normalized returns must more likely than not be positive ten years from now. In addition, there must not be any substantial threat of major value destruction.
g Wide Moat: Excess normalized returns must with near certainty be positive ten years from now. In addition, excess normalized returns must more likely than not be positive 20 years from now
Economic Moat Rating Criteria
Moat (Quantitatively): Return On Invested Capital (ROIC) Is Key
Morningstar® Economic Moat™ Rating
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Ø Use Cash Flows not Earnings Ø Cash is King! Ø Lack of IFRS/GAAP earnings now
not hindrance to moat creation Ø IC: Compare apples to apples
Ø Adjust IC when needed Ø Estimate appropriate cost of capital
Duration of excess returns is far more important than absolute magnitude
Measuring a Moat
Ret
urn
on In
vest
ed C
apita
l (R
OIC
)
No Moat
Narrow Moat
Wide Moat
Time Horizon:
Weighted Average Cost of Capital (WACC) 10 Years 20 Years
The Five Sources of Sustainable Competitive Advantage
Morningstar® Economic Moat™ Rating
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Economic Moats
Morningstar® Economic Moat™ Rating
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Intangible Assets
Sources of Moats
× Includes brands, patents, and regulatory licenses
× Brand increases the customer's willingness to pay
× Patents protect pricing power legally barring competition
× Government regulations hinder competitors from market.
Morningstar® Economic Moat™ Rating
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Switching Costs
Sources of Moats
× Time is money × The value of switching exceeds
the expected value of the benefit × Razor and blade model entrench
repeat consumables customers × Price not the only determinant
Morningstar® Economic Moat™ Rating
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Network Effect
Sources of Moats
× The value of a particular good or service increases for both new and existing users as more customers use that good or service
× With each additional node, the number of potential connections grows exponentially
Morningstar® Economic Moat™ Rating
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Cost Advantage
Sources of Moats
× Sustainably lower costs than competitors
× Irreplaceable process advantages × Superior location × Hard-to-amass scale × Access to a unique asset
Morningstar® Economic Moat™ Rating
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Efficient Scale
Sources of Moats
× Dynamic in which a market of limited size is effectively served by few companies
× Incumbents generate economic profits
× Newcomers discouraged from entering because returns in the market fall below the cost of capital
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Examples of Wide, Narrow, and No Moat Companies Morningstar Equity Research
Intangible Assets
Switching Costs
Network Effect
Cost Advantage
Efficient Scale
Coca Cola It’s just sugar water, but consumers pay a premium
Oracle Switching from Oracle’s tightly integrated databases could cause massive disruptions
eBay 145 million active buyers and sellers present a classic network effect
UPS Ground delivery network has low marginal costs and high returns on capital
Canadian National Cost advantages, efficient scale, and network effect form a steep barrier to entry
Dr Pepper Snapple Good brands, but a lack of scale hurts returns
Salesforce.com A popular product, but switching costs are low for users
United Health Sizable membership and solid provider network allows firm to scale its fixed costs
FedEx The high fixed-cost air express segment is still a large portion of revenue
Southern Company Utilities have natural geographic monopolies, but regulations restrain returns
United Continental Name recognition doesn’t result in sufficient pricing power
Macy’s Consumers easily pick and choose among many retailers
Deutsche Telekom Despite its scale, it has not been able to generate returns above its cost of capital
Alcoa Low-cost bauxite resources can’t offset industry oversupply
Aeroports de Paris Geographic monopoly, but regulation prevents economic profit generation
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Case Study: Starbucks
Starbucks brand clearly delivers pricing power. It sells a commodity at a premium price and is growing faster than the competition.
Starbucks’ Economic Moat
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Case Study
-2%
0%
2%
4%
6%
8%
10%
FY10 FY11 FY12 FY13 FY14E
Starbucks (Americas Segment) Dunkin Donuts' U.S.
Comparable-Restaurant Sales
Source: Company Filings, Morningstar Estimates
ü Intangibles Cost Advantage Network Effect Switching Costs Efficient Scale
Scale also contributes to the moat with Starbucks representing 1/3 of coffee cups sold at retail in the United States.
Starbucks’ Economic Moat
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Case Study ü Intangibles ü Cost Advantage Network Effect Switching Costs Efficient Scale
Starbucks’ major initiatives are supportive of its sources of moat.
Starbucks’ Economic Moat
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Case Study ü Intangibles ü Cost Advantage Network Effect Switching Costs Efficient Scale
Our Scorecard for Starbucks
Acquisitions • Teavanna • La Boulange • Evolution Fresh • Clover • Seattle Coffee
g International Expansion
• China • India • Brazil
g Channel Strategy • 30% retail cups; 4%
at-home • Via • K-Cups • Versimo
Our moat rating directly informs how we model cash flows.
Starbucks’ Economic Moat
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Case Study ü Intangibles ü Cost Advantage Network Effect Switching Costs Efficient Scale
Starbucks (SBUX) ROIC AnalysisLast Price Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating50 USD 55 USD Medium Ex emplary Wide Positiv e A-
Analy st R. J. Hottov y , CFA Industry : Restaurants Activ e Scenario: Base Case Market Cap: 76,080Phone & Email 312 244-7060 Sector: Consumer Cy clical Goodw ill Included: FALSE Enterprise Value: 76,286
rj.ho tto vy@mornings tar.com EV / Inv ested Capital: 7.8x
All values (except per share amounts) in: USD Millions
Morningstar Equity Research | 28 April 2015
Fair Value
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Adj. Return on Invested Capital 15.3% 18.3% 20.6% 11.5% 28.6% 23.0% 24.2% 26.4% 29.1% 31.8%ROIC, Incl Goodwill 14.8% 17.6% 19.7% 10.6% 25.9% 21.2% 22.4% 24.6% 27.1% 29.7%WACC 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%Economic Profit 458 677 924 190 1,606 1,506 1,827 2,212 2,653 3,121Adjusted Cash Tax Rate 38.4% 34.5% 30.3% 70.0% 32.7% 38.3% 37.4% 36.1% 36.4% 36.2%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Adj. Return on Invested Capital 15.3% 18.3% 20.6% 11.5% 28.6% 23.0% 24.2% 26.4% 29.1% 31.8%ROIC, Incl Goodwill 14.8% 17.6% 19.7% 10.6% 25.9% 21.2% 22.4% 24.6% 27.1% 29.7%WACC 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9%Economic Profit 458 677 924 190 1,606 1,506 1,827 2,212 2,653 3,121Adjusted Cash Tax Rate 38.4% 34.5% 30.3% 70.0% 32.7% 38.3% 37.4% 36.1% 36.4% 36.2%
The moat rating also impacts our ROIC fade assumptions.
Starbucks’ Economic Moat
28
Case Study ü Intangibles ü Cost Advantage Network Effect Switching Costs Efficient Scale
Starbucks (SBUX) ROIC AnalysisLast Price Uncertainty Stewardship Economic Moat Moat Trend Morningstar Credit Rating50 USD 55 USD Medium Ex emplary Wide Positiv e A-
Analy st R. J. Hottov y , CFA Industry : Restaurants Activ e Scenario: Base Case Market Cap: 76,080Phone & Email 312 244-7060 Sector: Consumer Cy clical Goodw ill Included: Enterprise Value: 76,286
rj.ho tto vy@mornings tar.com EV / Inv ested Capital: #DIV/0!
All values (except per share amounts) in: USD Millions
Morningstar Equity Research | 28 April 2015
Fair Value
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Stage I
Stage II
Stage III
WACC
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
Stage I
Stage II
Stage III
WACC
29
Morningstar® Wide Moat Focus IndexSM
Construction Process
30
Morningstar® Wide Moat Focus IndexSM
31
Source: Morningstar Direct January 2016
32 Source: Morningstar Direct January 2016
Morningstar US Wide Moat Focus Index Constituents – December 31, 2015
Name Ticker Por6olio Weigh:ng % Sector
Biogen Inc BIIB 5.38 Healthcare CSX Corp CSX 5.19 Industrials Wal-‐Mart Stores Inc WMT 5.18 Consumer Defensive Qualcomm Inc QCOM 5.14 Technology Varian Medical Systems Inc VAR 5.13 Healthcare United Technologies Corp UTX 5.10 Industrials Monsanto Co MON 5.10 Basic Materials Emerson Electric Co EMR 5.07 Industrials Union Pacific Corp UNP 5.04 Industrials Interna:onal Business Machines Corp IBM 5.04 Technology Berkshire Hathaway Inc Class B BRK.B 5.01 Financial Services Spectra Energy Corp SE 5.00 Energy American Express Co AXP 4.98 Financial Services VF Corp VFC 4.96 Consumer Cyclical Harley-‐Davidson Inc HOG 4.92 Consumer Cyclical Kansas City Southern Inc KSU 4.91 Industrials Twenty-‐First Century Fox Inc Class A FOXA 4.83 Consumer Cyclical Western Union Co WU 4.75 Financial Services Time Warner Inc TWX 4.74 Consumer Cyclical Polaris Industries Inc PII 4.53 Consumer Cyclical
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