Vanguard Health Care Hit Hard by Politics

Even great funds stumble occasionally. Case in point: Vanguard Health Care (VGHCX), which has delivered the highest return of any stock mutual fund over the past 30 years. After seven straight years of gains, Health Care lost 9% in 2016. And though its one-year return is now in the black, the fund trailed Standard & Poor’s 500-stock index by a decidedly unhealthy 17 percentage points over the past 12 months.

Problems for the fund, a member of the Kiplinger 25, stem mainly from troubles in its sector. Because health care makes up 18% of the U.S. economy, the sector often comes under fire during presidential election years, says the fund’s manager, Jean Hynes. In some election years, health care stocks take a hit before the vote; in others, it’s after. This time, “it was before and after,” she says.

Weighing most heavily on the sector were frequent denunciations of the high cost of pharmaceuticals and concerns that Congress might force drugmakers to roll back their prices. With 60% of Health Care’s assets invested in the catchall group that Hynes calls biopharmaceuticals, it’s no wonder her fund faltered. Changes to the Affordable Care Act loom, too, but Hynes says the structure of any new system would most likely be similar to what’s in place now and that any potential shifts would affect only 5% to 10% of the fund’s assets.

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Hynes, who tilts toward large, undervalued firms with good long-term growth prospects, had her share of winners. UnitedHealth Group, a managed-care company and the fund’s top holding, returned 43% over the past year, buoyed by Optum, UnitedHealth’s fast-growing business that offers a broad array of health care serv­ices. And Incyte, a biotech firm that is developing drugs that target a body’s immune system to fight cancer, soared 72%.

Incyte is a good example of the kind of company Hynes favors. She is focusing on investing in established firms that have swiftly adapted or new ones that are pioneers—companies that are “ahead of the curve in terms of innovation,” she says, and that have rich pipelines of new drugs. One such company is Biogen, which recently won regulatory approval for the first drug to treat spinal muscular atrophy, a rare and often fatal genetic muscle disease.