Better Know a Stock Picker

Welcome, Fools, to part 42 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

Vanguard Health Care (VGHCX)

Expense ratio

0.25%

Fund size

$27.2 billion

1-year return

18.44%

5-year return

10.94%

10-year return

16.56%

Sources: Vanguard, Morningstar.

Top 5 holdings

Company

% of Assets

Schering-Plough (NYSE:SGP)

5.4%

Eli Lilly (NYSE:LLY)

4.7%

Roche Holdings AG

4.0%

Sanofi-Aventis (NYSE:SNY)

3.9%

Forest Laboratories (NYSE:FRX)

3.8%

Source: Vanguard.

Meet Ed Owens
The fightin' team at Vanguard Health Care has been led by Ed Owens since opening day in 1984. And he's managed a 19.3% average annual return in the 23 years since. Or, in simpler terms, he's made many Vanguard clients rich. 

The numbers are startling: $10,000 invested in Vanguard Health Care in 1997 would be worth $46,303 today, versus just $21,681 for an index hugger.

Color me impressed. Wall Street? Not so much. The investapo whine that Vanguard's status as a sector fund is sure to hurt returns at some point. There's some logic to that argument; sector funds are frequently susceptible to macroeconomic malaise.

But not Owens' fund. Health Care has beaten its category peers in five of the past seven years. And it's been up on the S&P 500 in four of the past seven years.

Better still, when Owens wins, he wins in a blowout. Three times since 2000, Vanguard Health Care has beaten the S&P by double digits.

How he invests
That's astounding when you think of the hamster-wheel nature of most sector funds. Health-care funds turn over 112% of their portfolios on average. Owens, on the other hand, sells so rarely that he turns over just 7% of the portfolio each year. Wow. The IRS must hate this guy.

But not investors. They love him for his record and for his willingness to zig when others zag.

For Owens, that's common sense. He knows that most sector funds trade into and out of mosquito-sized highfliers in a quixotic quest for above-average returns. He wins because he won't play the same game. As he said in a 2003 interview excerpted at Morningstar.com, "I don't try to be an evangelist for sector funds."

His investing style is simply too different. Owens is buying cheap blue chips such as Medtronic (NYSE: MDT  ) while others are speculating on biotech. And still, over 23 years, he's earned close to 20% annually.

Is this fund for you?
That puts Owens at least within spitting distance of Peter Lynch as a fund manager, even if their styles -- Lynch is a growth investor, Owens is not -- couldn't be further apart.

What's more, at 0.25% annually, Vanguard Health Care's expense ratio is extremely cheap and forces Owens to earn his keep with market-beating performance. Color me thrilled. Pay-for-performance is far too rare in the fund world. (Or, for that matter, anywhere in corporate America.)

So, why don't I own Vanguard Health Care? I can't, and neither can you. The fund is closed to new investors.

But you needn't worry. If you're really in the market for a health-care fund, Motley Fool Champion Funds advisor Shannon Zimmerman added one to his portfolio of benchmark-busting funds in the February 2005 issue, and it's up on the bogey by more than 17% since. Want details? Click here to get 30 days of free access to Champion Funds.

And that's today's profile. See you back here next week, fund nation. Good night.

For more Foolish coverage of investors sporting healthy returns:

Think you can't beat the market with funds? Think again! The selections in Shannon Zimmerman's Motley Fool Champion Funds portfolio are up an average of 36% versus just 23% for their comparable benchmarks. Ask us for an all-access pass to get an unfettered look at all of Shannon's picks, manager interviews, and model portfolios. Go ahead; it's free for 30 days, and there's no obligation to subscribe.

Fool contributor Tim Beyers, who is ranked 6,540 out of more than 28,300 ranked participants in our Motley Fool CAPS investor-intelligence database, is a regular viewer of The Colbert Report. (Stay the course.) Tim didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at Tim's Fool profile. His thoughts on mutual funds, Foolishness, and investing in general may be found in his blog. Eli Lilly is an Income Investor pick. The Motley Fool's disclosure policy is always championship caliber.


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