Equities

What do investors get wrong about competitive advantages? They aren’t static.

October 08, 2025 - 4 min

Economic moats – those durable competitive advantages that protect a company from rivals – are often hailed as the holy grail of investing. But simply identifying a moat isn't enough. Far more important is understanding a company’s moat trajectory.

As highlighted by portfolio manager Mike Tian, "the mistake many investors make is to assume that competitive advantage doesn't change much throughout the holding period of an investment."

WCM takes a different tack, seeking companies with widening moats. The WCM team looks for businesses that are proactively becoming more difficult to compete against and more sustainable in their growth. "We want to partner with companies that are getting better," Tian emphasises, "hence those with positive moat trajectories."

It’s the trajectory of a moat that matters

Instead of just holding onto companies with established moats, WCM actively assesses how a company's competitive advantages are evolving. This involves a deep dive into various factors: is the company investing in ways that strengthen its market position? Can the company navigate technological disruption, regulatory changes, and evolving consumer preferences?

Conversely, WCM avoids companies where the best thing you can say about them is that they're “still a great company”. Tian succinctly warns, "Once you put the word 'still' in that sentence, it implies it is a good business but worse than it was in the past, and we believe that those are value traps."

A compelling example of WCM's moat trajectory approach is Sea Limited, a Southeast Asian e-commerce and fintech platform. As Tian explains, the company had a "rocky history", with investors being bearish on its prospects. However, WCM saw that the competitive landscape was thinning as "the dominant e-commerce platforms began to become more profitable and lengthen their lead over the number two, three, and four players."

Moreover, they recognised the potential of Sea Limited's growing fintech business, drawing parallels to the success of Mercado Libre in Latin America. This is a great demonstration of a company that has positively inflected.

“We have noticed the emergence, proliferation, and acceleration of an abundance of new themes” adds Daniel Wiechert, client portfolio manager. He notes for instance the team's early investments in European industrials, such as Saab, driven by increased defence spending in NATO-aligned countries. These companies, according to Wiechert, have seen their "economics improve tremendously with significant runway ahead."

Wiechert also highlights the importance of looking beyond the obvious beneficiaries of mega-trends. While many investors focused on the Magnificent 7 tech giants, WCM identified compelling opportunities in companies like Celestica, which makes white label network switches, and Argan Incorporated, a contractor building natural gas turbine complexes. So, it is not just about a static moat, instead the focus is on those companies that are positively inflecting.

“We've conducted extensive research on the MAG 7 cohort. Other than Amazon, when sizing up their growth drivers, we have historically found better expressions with clearer moat trajectories at much more compelling valuations in other businesses, especially with lower market capitalisations,” he adds.

The power of inflection stories

Alongside identifying positive moat trajectories, WCM actively seeks out "inflection stories." As Tian explains, "it's much more interesting when you're identifying companies that are actually going to be perceived very differently, let's say two or three years down the road than they are today." These inflection points represent a narrative change, a shift in market perception where the company's future value is not yet recognised. In essence, WCM aims to identify companies on the cusp of a transformation, where a catalyst is poised to unlock significant value and reshape market perception.

When looking at emerging markets, another interesting development is the value theme in Korea. Historically, Korea has had very cheap valuations driven by poor corporate governance. However, in recent years, Japan has undergone a successful corporate value transformation, and there seems to be a strong impetus to replicate that improvement in corporate governance in Korea, supported by new laws.

The WCM advantage

By focusing on moat trajectory and seeking inflection stories, WCM aims to identify companies that are not just successful today, but are poised to become even more successful in the future. This dynamic approach, combined with a rigorous understanding of industry nuances, allows them to uncover investment opportunities that traditional static analysis might miss. "We see plenty of unexplored territory attached to current mega themes, and we are actively searching for positive moat trajectory cases that will benefit from these trends", concludes Wiechert.

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