(GuruFocus, November 3, 2009) Investment Guru Edward Owens operate in a narrow space – he manages the nearly $20 billion in Vanguard Health Care Fund. There are fewer mutual funds bigger than his in terms of asset under management; however, there are also fewer funds invest in narrower group of stocks.
That does not stop him from pulling off one of the best performances in the industry. Since its inception on May 23, 1984, the fund returned an average of 16.63% per year. $1000 invested in the fund would be more than $49,000. For the past 1, 3, 5, and 10 years, the fund returned 16.05, -1.53, 5.57, and 8.68% respectively, beating the S&&P Health Care Index’s performance by a large margin, according to data presented in the Fund’s website.
One may argue the Health Care industry just had an above-average and probably-not-so-deserved growth period during the past two decades. The fact that the fund outperformed the index and its peers should pacify the argument thatEdward Owens happened to be at the right place in the right time, a.k.a, he just got lucky for the past quarter century.
Edward Owens in very economic with his words, and rarely we see him on the media, TV or otherwise. In June of this year, Vanguard sent an internal reviewer Dan Newhall to interview him and co-manager Jean Hynes. The video can be watch here.
Here are some excerpts of the interview.
On value investing approach:Dan Newhall: So you mentioned a methodical, low-turnover, value investment style. Why did the style evolve to that, and what are some of the benefits of that kind of a patient approach to investments?
Ed Owens: Well, I think it's part of my personality, but it really evolved out of the intense fundamental approach we bring to investing in companies. The greatest amount of our time is spent day by day trying to understand companies in their entirety. Learning all of their products, what makes them tick and, from that, forecasting how fast these companies will grow.
It's important to know the whole field that a company competes in, in order to do this. So there's a tremendous amount of effort involved in building a framework and understanding how these companies operate and building valuation models as to what makes a company more interesting for an investor.
And then, trading is also important. We trade in a methodical way. By buying carefully low and selling carefully high, we're able to capture a bigger range of the change in the value of companies that we invest in.
On diversification within one sector:Dan Newhall: How do the two of you manage risk within what is a sector portfolio?
Ed Owens: The health care sector has some unique characteristics that make creating a diversified fund a little bit easier than probably exists for other sectors. There is a large consumer component to the consumption of health care. There is also a very large intellectual property component to the derivation of profits in health care, probably the most important factor that distinguishes the sector. And there's also a high service component.
And, of course, the sector is very international in nature, and that creates another opportunity for diversification.
Jean Hynes: I think our holdings also, even within a sector of health care, are diversified by the fact that we do know what the valuations are. So we could have, within pharmaceuticals, companies that maybe have a really good near-term outlook but still are attractive valuations, and that is offset or is diversified by a company that maybe is struggling. But we see that they may have something out in one or two or three years, and we're willing to take a bet on that company. So the holdings even within a sector can sometimes offer diversification.
Ed Owens: The fact that we approach everything from a value-oriented stock analysis point of view tends to create a fund that has lower volatility and less risk.
Edward Owens has reported his 3Q09 holdings, and here are his top stocks:
Conclusion
Market has rallied from its multi-decade lows. So fast and so high that some people are calling “too fast too high”. If one wants to search for a sector that did not participate the rally in the same fashion as the rest of the market, health care might be it.
I am not suggesting you should invest in a sector like Edward Owen. If you do, you might want to take a look at the companies that Edward Owens bought.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Edward Owens for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
That does not stop him from pulling off one of the best performances in the industry. Since its inception on May 23, 1984, the fund returned an average of 16.63% per year. $1000 invested in the fund would be more than $49,000. For the past 1, 3, 5, and 10 years, the fund returned 16.05, -1.53, 5.57, and 8.68% respectively, beating the S&&P Health Care Index’s performance by a large margin, according to data presented in the Fund’s website.
One may argue the Health Care industry just had an above-average and probably-not-so-deserved growth period during the past two decades. The fact that the fund outperformed the index and its peers should pacify the argument thatEdward Owens happened to be at the right place in the right time, a.k.a, he just got lucky for the past quarter century.
Edward Owens in very economic with his words, and rarely we see him on the media, TV or otherwise. In June of this year, Vanguard sent an internal reviewer Dan Newhall to interview him and co-manager Jean Hynes. The video can be watch here.
Here are some excerpts of the interview.
On value investing approach:Dan Newhall: So you mentioned a methodical, low-turnover, value investment style. Why did the style evolve to that, and what are some of the benefits of that kind of a patient approach to investments?
Ed Owens: Well, I think it's part of my personality, but it really evolved out of the intense fundamental approach we bring to investing in companies. The greatest amount of our time is spent day by day trying to understand companies in their entirety. Learning all of their products, what makes them tick and, from that, forecasting how fast these companies will grow.
It's important to know the whole field that a company competes in, in order to do this. So there's a tremendous amount of effort involved in building a framework and understanding how these companies operate and building valuation models as to what makes a company more interesting for an investor.
And then, trading is also important. We trade in a methodical way. By buying carefully low and selling carefully high, we're able to capture a bigger range of the change in the value of companies that we invest in.
On diversification within one sector:Dan Newhall: How do the two of you manage risk within what is a sector portfolio?
Ed Owens: The health care sector has some unique characteristics that make creating a diversified fund a little bit easier than probably exists for other sectors. There is a large consumer component to the consumption of health care. There is also a very large intellectual property component to the derivation of profits in health care, probably the most important factor that distinguishes the sector. And there's also a high service component.
And, of course, the sector is very international in nature, and that creates another opportunity for diversification.
Jean Hynes: I think our holdings also, even within a sector of health care, are diversified by the fact that we do know what the valuations are. So we could have, within pharmaceuticals, companies that maybe have a really good near-term outlook but still are attractive valuations, and that is offset or is diversified by a company that maybe is struggling. But we see that they may have something out in one or two or three years, and we're willing to take a bet on that company. So the holdings even within a sector can sometimes offer diversification.
Ed Owens: The fact that we approach everything from a value-oriented stock analysis point of view tends to create a fund that has lower volatility and less risk.
Edward Owens has reported his 3Q09 holdings, and here are his top stocks:
No. 1: ScheringPlough Corp. (SGP, Financial), Weighting: 8.22% - 52,941,700 Shares
Schering-Plough Corporation and its subsidiaries are engaged in the discovery development manufacturing and marketing of pharmaceutical products worldwide. The company operates primarily in the prescription pharmaceutical marketplace. However where appropriate the company has sought regulatory approval to switch prescription products to over-the-counter status as a means of extending a product's life cycle. Scheringplough Corp. has a market cap of $46.4 billion; its shares were traded at around $28.4 with a P/E ratio of 15.7 and P/S ratio of 2.5. The dividend yield of Scheringplough Corp. stocks is 0.9%.No. 2: Forest Laboratories Inc. (FRX, Financial), Weighting: 4.88% - 30,133,000 Shares
Forest Laboratories Inc. and its subsidiaries develop manufacture and sell both branded and generic forms of ethical drug products which require a physician's prescription as well as non-prescription pharmaceuticalproducts sold over-the-counter. Forest's most important United States products consist of branded ethical drug specialties marketed directly or to physicians by the company's Forest Pharmaceuticals Forest Therapeutics and Forest Specialty Sales salesforces. Forest Laboratories Inc. has a market cap of $8.29 billion; its shares were traded at around $27.48 with a P/E ratio of 7.8 and P/S ratio of 2.1. Forest Laboratories Inc. had an annual average earning growth of 30.7% over the past 10 years. GuruFocus rated Forest Laboratories Inc. the business predictability rank of 2.5-star.No. 3: McKesson Corp. (MCK, Financial), Weightings: 3.76% - 11,489,900 Shares
McKesson Corporation the world's largest health care service and technology company delivers unique supply and information management solutions that reduce costs and improve quality for its health care customers. The Company is organized under two operating segments: Health Care Supply Management and Health Care Information Technology. Mckesson Corp. has a market cap of $15.85 billion; its shares were traded at around $59.54 with a P/E ratio of 13.5 and P/S ratio of 0.2. The dividend yield of Mckesson Corp. stocks is 0.8%. Mckesson Corp. had an annual average earning growth of 15.1% over the past 10 years. GuruFocus rated Mckesson Corp. the business predictability rank of 2-star.No. 4: AstraZeneca PLC (AZN, Financial), Weighting: 3.67% - 14,881,500 Shares
AstraZeneca PLC is one of the top five pharmaceutical companies in the world based on sales and is a therapeutic leader in cardiovascular gastrointestinal oncology anesthesia including pain management central nervous system (CNS) and respiratory products. They are engaged in the research development manufacture and marketing of ethical (prescription) pharmaceuticals and agricultural products and the supply of healthcare services. Astrazeneca Plc has a market cap of $64.33 billion; its shares were traded at around $44.43 with a P/E ratio of 7.6 and P/S ratio of 2. The dividend yield of Astrazeneca Plc stocks is 4.7%. Astrazeneca Plc had an annual average earning growth of 12.2% over the past 10 years. GuruFocus rated Astrazeneca Plc the business predictability rank of 2-star.No. 5: Abbott Laboratories (ABT, Financial), Weightings: 3.62% - 13,300,000 Shares
Abbott Laboratories is a global broad-based health care company devoted to discovering new medicines new technologies and new ways to manage health. Abbott products span the continuum of care from nutritional products and laboratory diagnostics through medical devices and pharmaceutical therapies. Abbott comprehensive line of products encircles life itself addressing important health needs from infancy to the golden years. Abbott Laboratories has a market cap of $78.7 billion; its shares were traded at around $50.91 with a P/E ratio of 14.1 and P/S ratio of 2.7. The dividend yield of Abbott Laboratories stocks is 3.1%. Abbott Laboratories had an annual average earning growth of 4.4% over the past 10 years. GuruFocus rated Abbott Laboratories the business predictability rank of 5-star.No. 6: Eli Lilly and Company (LLY, Financial), Weightings: 3.61% - 19,879,900 Shares
Eli Lilly and Company discovers develops manufactures and sells products in one significant business segment -pharmaceutical products. The company directs its research efforts primarily toward the search for products to diagnose prevent and treat human diseases. The company also conducts research to find products to treat diseases in animals and to increase the efficiency of animal food production. Eli Lilly And Company has a market cap of $39.12 billion; its shares were traded at around $34.05 with a P/E ratio of 7.4 and P/S ratio of 1.9. The dividend yield of Eli Lilly And Company stocks is 5.8%. Eli Lilly And Company had an annual average earning growth of 4.4% over the past 10 years. GuruFocus rated Eli Lilly And Company the business predictability rank of 4.5-star.Conclusion
Market has rallied from its multi-decade lows. So fast and so high that some people are calling “too fast too high”. If one wants to search for a sector that did not participate the rally in the same fashion as the rest of the market, health care might be it.
I am not suggesting you should invest in a sector like Edward Owen. If you do, you might want to take a look at the companies that Edward Owens bought.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Edward Owens for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
