Tuesday, January 31, 2012

Edward Owens: Vanguard Healthcare Fund Update

Edward Owens has been manager of the Vanguard Healthcare Fund (VGHCX) since 1984. The fund has returned more than 12%/year for the past 15 years and more than 16%/year since inception.

Vanguard Healthcare has very low turnover (~9%) so the investments by the fund tend to have a longer term horizon. Nearly 40% of the fund's holdings are represented by the top ten.

Top Ten Holdings
Merck (MRK)
United Health (UNH)
Forest Labs (FRX)
Abbott Labs (ABT)
McKesson (MCK)
Roche Holdings (RHHBY)
Pfizer (PFE)
Amgen (AMGN)
AstraZeneca (AZN)
Eli Lilly (LLY)

Owens added no new stocks to the portfolio this past quarter and there were no additional shares bought among the top ten positions.

Slight reductions in two top ten positions were made:

Abbott (ABT) was reduced by ~10% while Eli Lilly (LLY) was reduced by ~5%.

Several meaningful increases to much smaller positions were made. Yet, even after the increases, none of these positions individually make up even 1% of the portfolio.

Boston Scientific (BSX)
Hospira (HSP)
Zimmer Holdings (ZMH)
CVS Caremark (CVS)

The turnover by investment managers at a number of other mutual funds is so high that what is owned at any given moment doesn't often tell you much.

Less activity in a fund may make it less exciting, but the approach should reduce frictional costs (taxes, commissions). The main driver of long-term returns is generally achieved by owning businesses that themselves compound intrinsically at a high rate and not paying too much for the privilege of ownership.

To me, the approach is an admirable one. Success will always comes down to the quality of the businesses owned and the price that was paid. Things like superior trading skills, well-timed sector rotation, or technical analysis not required.


Long PFE. No positions in other stocks mentioned.

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