Reform Won't Hurt This Health Care Fund

08/11/2009 1:00 pm EST

Focus: FUNDS

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Daniel Wiener, editor of The Independent Advisor for Vanguard Investors, says Vanguard Health Care will do well no matter what health care reform ultimately looks like.

Not surprisingly, given the continued news about health care reform and the lagging performance of Vanguard Health Care (VGHCX) so far in 2009, I've been asked if our overweight towards health care stocks still makes sense. The sector represents a bit more than 13% of the overall US stock market and less than 10% of foreign markets, by comparison.

I do favor and overweight health care in our portfolios. And that's a good thing, because I think the sector is poised for outperformance in the coming months.

Almost from the minute the Obama administration came into office, VGHCX has been lagging.  This being said, every time the market has some down days, the health stocks hold up much, much better. One reason: They continue to offer impressive dividend yields and are seen as safe havens when markets get rocky.

From the beginning of 2009 through the March 9th market low, for instance, VGHCX lost 18.2% while Vanguard 500 Index (VFINX) and Vanguard Total Stock Market Index (VTSMX) both dropped 24.6%. Since then, however, Health Care has gained 30.9% while 500 Index and Total Stock Market are up 47.2% and 49.4.

The fear, of course, is health reform. And Wall Street has been voting with its feet—running from the sector without considering the historical precedent of past attempts at reform. I can't tell you what form the next reform will take. But whatever we ultimately come up is not going to be as dire as so many critics seem to think—there's just no way this country [will] move to a form of socialized medicine. Oh yes, it'll be called that by the critics, but there'll be plenty of profits left for the drug and managed care companies after all is said and done.

And remember that should reform mean more health care for more people, this will mean more drug demand and more service demand. The managers we're invested with who have large holdings in the area know more about this than you or I could after years of study (and probably could design a better health care system than any government committee, for sure). 

We're all going to need health care. And no matter what is said, the drug companies are not going to conduct research and development for free, so they have to be able to make a profit, or they will simply close up their labs and sell what they've got until it goes off-patent, then shut down. The government just won't let this happen.

Anyway, you and I are going to make money on our health care holdings. Just see how well Health Care did in the aftermath of the last attempt at reform. (From its lows in June 1993 through the end of 1998, Vanguard Health Care comfortably beat the Standard & Poor’s 500 index—Editor.) Enough said!

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