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

I have owned and dollar costed Health Care since 1996 and have enjoyed great returns since that time.  At my yearly portfolio checkup, Vanguard advisors suggested I ditch the fund since it was highly specialized and overweighted my investments in the Health Care sector.  This may be some of the reason the assets are being drained. 

I decided against the advice and kept the fund.  Sure, it has not performed that well the last couple of years, but I am sold on this fund for the long term, not only because of the management team but also the idea that health care will become even more important over the next several years.  Now whether those companies will be profitable?  That remains to be seen.  I think Health Care is a long-term play.

I would never buy this fund for moral reasons, no matter what the profit potential may be, and I would judge it to be pretty good for the forseeable future. One of the reasons this country is in such sad shape is that it has such a horrible health care system, probably the worst in the developed world. The reason of course is that our system is almost completely based on profit with little or no consideration for patients and their outcomes. I refuse to play that game, even though the odds of our idiotic and bought off politicians ever changing the status quo are about zero, no matter who gets elected. People making huge amounts of money off ripping off sick people (the major cause of bankruptcy in the U.S.) ought to be embarrassed IMO.

      - Mike

Re: Vanguard Explorer, compare returns and expenses against Vanguard's Small Cap Growth Index fund, and once again the dirty-little-not-so-secret that index funds offer more realistic risk/reward outcomes for most investors is true again here. Vanguard's own index fund offers comparable returns at half the expense.

 Dan, why would an investor choose Explorer over the index fund?

The is the age old question: To actively manage or not to actively manage. It depends on whether you think active management has a shot at adding value over an index fund over the long term. Even though Small Growth Index has gotten the better of Explorer in recent years, Explorer, with its low expenses for an active fund and its stable of respected manager has a better chance than many of beating the index over time. There are no guarantees, of  course, and a lot of things could trip explorer up, such as its still huge asset base.

Extremely well said !

While I don't think this will prevent me from investing in Health Care stocks,  I concur 100 % in this assessment of how our Health Care system works - or doesnt work.

Its unconscionable that politicians pander to insurance companies, drug companies who create their own "studies" for use as marketing tools, and medical lobbyists that contribute to campaigns.

Let me explore you're ideas with material more neutral than health care. The cost of oil is well over $100/bar and will stay there forever no matter what. I think you would agree a lot of innocent people are hurt because of this expense ALL OVER THE WORLD! The only solution is sharp demand reduction which ain't going to happen. If I own XOM would you consider my action immoral? After all I am "...making huge amounts of money off ripping off [poor] people..."? What would you say to a poor person who has a number of shares of XOM? Is he participating in an immoral act or is his participation a legitimate cut in the action? Do you believe that non participation in XOM ownership is moral especially when such a position removes any chance to effect change? The wolf has a better chance for a pork chop dinner if he is in side the hut than outside trying to get in.

-pd