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Vanguard announced on Thursday that it had reopened the small growth fund Vanguard Explorer and sector offering Vanguard Health Care to new investors. These funds were worth hanging on to when they were shut and they are worth considering now, as long as investors maintain appropriate expectations. Both funds have been closed for a while. Health Care shut its doors in March 2005 and Explorer about a year later in February 2006. Health Care has gained more than 7% annualized since it closed through July 31, 2008, but its total assets still haven't budged much from about $23 billion because it has seen a steady stream of outflows (or more investor redemptions than purchases) during that time. Explorer has lost about 1.5% from the time it shut off new investments through the end of July and also has seen steady outflows, so its total assets have slipped from $12 billion to $10 billion. Make not mistake. These funds are still huge in absolute and relative terms. They are still both the largest funds in their respective categories by long shots. Their size could make it harder for them to outperform their peers and benchmarks by the magnitude that they have in the past. Yet, both funds have advantages that make them solid long term holdings. They both have lower expenses than nearly all of their actively managed rivals. Health Care also still has Ed Owens and his team from Wellington Management, arguably among the best sector fund managers in the business. Explorer has seven subadvisors, and having that many cooks in the kitchen can lead to a mediocre stew. Yet each of the managers is experienced and has an independent approach that seems to compliment rather than confound the others'. Vanguard also made nice addition to the fund's roster of stock pickers earlier this year by hiring Lanny Thorndike, manager of small growth analyst pick Century Select Small Cap CSMVX, to run a portion of Explorer. Furthermore Vanguard's record of closing funds when inflows get too hot to handle gives me some confidence. They use a wide array of tools to manage inflows and outflows, including redemption fees, adjusting minimum investment levels and capping the amount existing investors can contribute. Health Care for example will still require $25,000 for initial investments now that it's open, which limits its audience somewhat. So, I think these funds still have a good shot at being above average holdings, though investors should realized they may not be has spry as they used to be. What do you think? Dan Culloton
Editor, Vanguard Fund Family Report
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