A closer look at the data also suggests that wide moat stocks, those of companies with meaningful competitive advantages, are trading at bigger discounts than narrow moat stocks or stocks of companies with no moats at all, and that small cap stocks are trading at larger discounts than mid and large cap stocks. A narrowing of these valuation anomalies may be beneficial for our portfolio, which is typically comprised of what we believe are competitively advantaged small and mid-cap companies likely to experience above average earnings growth backed by long term secular trends.
Figure 2: Morningstar Market Fair Value Estimate | 3 years
Looking at this same data point over the last 3 years suggests that the level of undervaluation in the market is not as great as it was in March 2020, but it does suggest that the risk reward for global equities has become more attractive.
After keeping pace with our peer group average in 2020, reducing our exposure to richly valued growth companies in late 2020 helped us to meaningfully outperform our peer group in 2021. We have slightly underperformed our peer group thus far in 2022 but we feel that the current market environment is providing us with opportunities to increase our exposure to high quality companies with attractive growth prospects that are now trading at reasonable valuations.
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