Being able to invest in any company, in any sector, is a genuine advantage most investors underuse. Some industries make it easy to build a durable competitive edge, an economic moat, and others are structurally brutal no matter how good the management is. Knowing which is which changes where you should be looking.
The same skill, wildly different odds
Morningstar tracks 13 publicly traded auto parts companies, and only two have managed to dig an economic moat. The rest fight constantly just to earn a decent return on capital, and any edge they find tends to be short-lived. American Axle is a clean example: five years into a stretch when Americans couldn’t get enough SUVs, the company posted solid low-to-mid-teens returns on capital. When SUV demand collapsed and its cost structure stopped being competitive, returns fell to single digits and losses piled up. That’s the auto parts sector in miniature: brutal economics that no amount of good management fully offsets.
Compare that to asset management, where all 18 publicly traded companies Morningstar covers carry some form of moat, a dozen of them wide. Anyone can register a mutual fund for around $100,000 in legal and filing fees, but building the distribution network to actually gather assets is a different problem entirely. Once assets arrive, they tend to stay, which lets established managers earn high returns on capital without much effort. Even a near-worst-case scenario shows the moat holding: when Janus’s investment style fell out of favor in the early 2000s and a trading scandal drove clients out, assets under management got cut nearly in half, yet operating margins only dipped to 11% before recovering to around 25%.
Where moats cluster, and where they don’t
A few patterns hold up across sectors. Software companies build moats more easily than hardware makers, because software has to integrate with other systems, which creates switching costs hardware rarely matches. Business services firms that embed themselves into a client’s operations, think data processors or companies that own irreplaceable databases like credit bureaus, show some of the highest moat rates Morningstar tracks, because ripping them out is expensive and risky for the client. Financial services is similarly rich in moats: nobody’s starting a new bulge-bracket investment bank to compete with Goldman Sachs, and sticky client assets protect even mediocre banks and asset managers.
Consumer goods houses what Warren Buffett calls “the inevitables,” brands like Coca-Cola or Colgate that took decades of advertising and consistency to build and aren’t going anywhere. Consumer services sits at the opposite end: restaurants and retailers face almost no switching costs, since walking to the shop next door takes zero effort, and any concept that works gets copied fast. The exceptions, companies like Starbucks, earned their moat by getting a thousand small things right consistently for years, not through a single defensible advantage.
Industrial materials and commodity producers rarely build moats because customers buy purely on price. Energy is a partial exception: natural gas doesn’t ship economically across oceans the way oil or copper does, so regional producers with low-cost reserves can hold a real cost advantage, and pipeline operators often enjoy local monopoly economics once a route can’t support a second pipeline. Utilities look like natural monopolies but regulators cap their returns on purpose, which is good for ratepayers and limiting for shareholders.
The number that actually tells you whether a moat is real
A moat matters because it lets a company stay profitable longer, and the way to measure that is return on capital, how much profit a business generates relative to what’s invested in it. Three versions of this measure show up most often. Return on assets is the simplest and works best as a starting point; nonfinancial companies consistently posting an ROA around 7% or higher likely have some kind of edge. Return on equity accounts for the fact that many firms use debt to boost returns, so it needs to be read alongside leverage; companies consistently clearing 15% ROE are more likely than not to have a real moat. Return on invested capital combines the two, folding in debt while stripping out financing distortions, which gets closest to how efficiently the underlying business actually operates.
The broader point is that you don’t have to own something in every sector. Following the market into industries with structurally poor economics, just because everyone else is there, is a worse use of capital than going where competitive advantages naturally exist in the first place.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
