Vanguard Closes Health Care Fund

Vanguard Group, the second-biggest U.S. mutual fund company, said it closed its Health Care fund Thursday to prevent “speculative investors” from buying shares.

Vanguard’s decision to close its top-performing fund of 1998 to new investors is the clearest sign yet that individuals are trading in and out of mutual funds more frequently--and that the fund industry is growing concerned.

“There’s no question that there’s more short-term trading of funds these days,” said spokesman Brian Mattes. “You’re starting to see a lot more investors starting to trade individual mutual funds as though they were individual stocks, which they’re not.”

Vanguard Health Care had a total return of 40.8% in 1998, compared with the 23.3% return of Vanguard’s Total Stock Market fund, which mimics the Wilshire 5,000 index, and the 28.6% return of Vanguard’s 500 Index fund, which mimics the blue-chip Standard & Poor’s 500 index.

Executives say they are closing the Health Care fund after watching a net $564 million pour into it in January, more than four times the cash that flowed into the fund in January 1998, and after seeing assets more than double to $10 billion during the last year.

“We are concerned that much of the recent cash flow into the fund is from investors who are chasing ‘hot’ performance and who intend to redeem their shares when the fund’s performance cools,” said Chairman John Brennan.

As short-term traders jump into and out of a fund, they create transaction costs that long-term shareholders must bear. They also make it difficult, analysts say, for fund managers to invest for the long term.

The Valley Forge, Pa.-based company said the fund will stay shut for at least six months.