Sequoia Fund Reopens After 26 Years: A Look Inside

Warren Buffett is best known as the Chairman of Berkshire Hathaway (BRK.A)(BRK.B) and one of the richest men in the world. He is easily the greatest investor of the 20th century, if not of all time. Since 1965, he’s produced average annual gains of 21%. Put another way, a mere $1,000 invested with Buffett when he took over Berkshire Hathaway would be worth an astounding $6 million today.

However, few investors realize that Buffett produced his greatest gains long before he became involved with Berkshire Hathaway. He actually started out managing money via a series of partnerships in the ‘50s. During the first five years, Buffett produced gains of 251%, beating the Dow nearly four fold. By this time, Buffett had 90 partnerships based all over the US. He consolidated all of their holdings into one group, Buffett Partnerships Ltd.

Over the next five years, Buffett produced the best results of his life. Ten years after their inception, Buffett Partnerships Ltd was up over 1,000%, nearly tenfold the Dow’s return for the same time period. By this time, Buffett and many of his partners had become millionaires.

But the biggest gains were yet to come.

With $44 million under management, Buffett produced the single greatest year of investment gains in his life: an incredible 59% in 1968. Most money managers would have used these results to bring on an enormous amount of new clients. Buffett, ever the straight-shooter, chose to liquidate the partnerships, saying that he was “unable to find any bargains in the current market".

Having closed up shop, Buffett found himself constantly bombarded by money managers for the names of his former clients. He turned all of them down. Instead, he directed his clients to go to one man: Bill Ruane.

Buffett had met Ruane while attending Benjamin Graham’s value investing seminar at Columbia University. Ruane made such an impression on Buffett that he was the only guy Buffett recommended former clients to.

Ruane opened an investment firm with another former Graham student, Rick Cunniff. Thanks to Buffett’s recommendation, they were able to raise about $20 million in capital. Their fund officially opened for business in July 1970. Between then and today, they quadrupled the performance of the S&P 500, turning a $10,000 stake into $2 million.

For decades investors tried to invest in Ruane’s fund. However, he was interested in producing large gains, not accruing more assets under management. Because of this, he closed the fund to new investors in 1982. It remained closed for 26 years.

Until last Thursday.

Because the fund’s original investors have been dying—most of them were middle-aged when they first invested in 1970—the fund’s assets have fallen in half from $6 billion to $3 billion. On top of this, the volatility in the financial markets has made many fantastic businesses cheap again.

I’m talking about the Sequoia Fund [SEQUX].

While management at SEQUX has changed—the firm added Robert Goldfarb in 2004 and Bill Ruane died of lung cancer in 2005—the fund’s focus remains on the same long-term value investing that inspired such confidence in Buffett back in the late ‘60s.

For one thing, SEQUX is a buy and hold fund. And when I say “hold” I’m talking about years—the fund’s average holding period is nearly a decade (7.5 years to be precise). A long-term strategy is a hallmark of the value investor. Buffett himself has stated that his favorite holding period is “forever.” However, in SEQUX’s case, the long-term focus isn’t merely for investment purposes; it’s also meant to increase shareholder value.

Most fund managers—whether they be mutual or hedge—turnover their assets rapidly. The record for rapid turnover probably goes to GLG trader Greg Coffey who turned his entire $5 billion portfolio over more than twice a day in May.

But, in general, most fund managers turnover their entire portfolio at least once a year, if not more. Doing this generates a lot expenses from the fund’s brokerage houses… expenses that are then passed off onto the fund’s clients in the form of high fees.

In SEQUX’s case, because the fund experiences such a low turnover, it maintains extremely low fees. In fact, according to their contract, Ruane, Cunniff, and Goldfarb could only charge 1% in fees per year. In years when the fees happen to be larger—in 2006 they were 1.03%—Ruane, Cunniff, and Goldfarb simply refund the amount over 1%.

SEQUX is also an extremely focused fund. Sequoia’s management only invests in businesses they understand. And when they do bet, they bet big: the entire $3 billion portfolio is spread out over only 24 stocks. 70% of it is in the top ten holdings:

Company	% of Fund’s Assets
Berkshire Hathaway (BRK.A)(BRK.B)	23%
Mohawk Industries (MHK)	7%
Martin Marietta (MLM)	6%
Fastenal (FAST)	5.8%
Progressive (PGR)	5.4%
TJX Companies (TJX)	5.2%
Porsche Automobil (PSEPF.PK)	4.9%
Idexx Laboratories (IDXX)	4.6%
Target (TGT)	4.4%
Bed Bath & Beyond (BBBY)	4.0%

As you can see, the appreciation between Buffett and the Sequoia fund is mutual—the fund’s largest position is in Buffett’s Berkshire Hathaway. The other positions, like Berkshire, are all industry leaders—Mohawk is the second largest carpet producer in the US, Idexx is the largest manufacturer of veterinarian testing products, etc.

SEQUX also shares Buffett’s admiration for top-quality consumer discretionary businesses like Porsche, TJX Companies, Bed Bath & Beyond, etc. Because the fund maintains such a long-term focus, it has the discipline to buy businesses no one else wants to touch, thereby getting them on the cheap. Today, with consumer spending dropping off a cliff, most of the above companies are cheaper than they’ve been in years. At some point in the next three to five years, US consumer spending will pick up again. When it does, these businesses’ share prices will soar. When they do, SEQUX will make a bundle.

It certainly has in the past. Had you invested just $10,000 in SEQUX back in 1970, today you’d be sitting on over $2 million, nearly four times the amount you’d have made had you invested in the S&P 500.

Focused, long-term value, small fees, and big gains… no wonder Buffett admired these guys so much.

The fund just opened its doors to new investment for the first time in 26 years. The minimum investment is $5,000. To learn more, check out the fund’s prospectus: http://www.sequoiafund.com/prospectus.htm.

Comments

[Archman Inv...:]

I agree with the above poster.
But lets get to the "real" reason the fund is re-opening.
The fund has had big outflow net redemptions over the past few years and the greedy "asset gathering" management does not like to see their paychecks shrinking.
So what they do is say to the public "We see so many opportunities out there, we want more cash to make buys in the market"

LOL. What a crock.

These people, like all mutual fund managers are asset gatherers who make money on the amount of assets they manage, not on their returns.

Mutual funds are the worst possible investments out there and if someone does not have time to manage a portfolio, they should be invested in extremely low cost ETF's and that's it.

2008 Aug 18 12:14 PM

[Archchancellor:]

It's hardly breaking news that fund managers want more money managed at one time so that their paychecks are larger. That does not mean that they don't care about the fund's performance or that they do not see opportunity in the market. Funds only stay large if people keep their money in them and they maintain or appreciate capital value. Bad fund performance is bad for short-term manager paychecks and long-term fund asset value.

Furthermore, mutual funds are not universally "the worst possible investments out there" - it's simply a bet that an investment professional can get a return ~1% higher than you could on your own (that 1% representing the management fee). Maybe they can, maybe they can't, but it certainly has some merit and may be worthwhile in certain cases. I can think of far worse investments.

@archman82011: Tone back the cynicism and take a more measured approach.

2008 Aug 18 02:01 PM

[Think-About-It:]

After all the great lead up I was expecting to see some interesting, market-beating/leading holdings. All I got was 23% Berkshire Hathaway and a bunch of retailers and others tied directly to the fate of the U.S. consumer who is all tapped out.

U.S centric portfolios like this will not come close to repeating past returns when the U.S. was the world's growth engine. Times have changed. I like concentrated funds but looking at their holdings I come away thinking the Sequoia looks like a "lazy Portfolio" with no vision.

Also, the founder (who Buffett was refering clients to) has passed away so where's the appeal? How did Magellin do after Peter Lynch left? How will Berkshire do after Buffett passes on?

I'll pass.

2008 Aug 18 02:10 PM

[mkreisel:]

How did SEQUX perform during the 73/74 bear market?

2008 Aug 18 03:03 PM

[Archman Inv...:]

archchanceII:

Nope. I am not about to tone back the cynicism and take a more measured approach.
The majority of mutual fund managers are criminals who can only make money in bull markets and who do nothing to preserve a fund holders money in bear markets. There is no excuse as to why these overpaid, educated, MBA types, who all claim to be experts in the field, should lose even close to what the S & P 500 loses in a bear market.

I do not think I am smarter than anyone, Not you, not anyone. I am just a simple, self employed family man. No MBA, and I do not manage money for a living. I invest only in stocks.
My 15 yr annualized portfolio return: +20%
My only losing year: 2002, down -4%
My YTD return: +5%.

Why is it "a nobody" like me, can manage my money, and have the sort of returns that 99.9% of fund managers cannot even come close to attaining? Because I have a true vested interest in managing my money and I do not get paid for it, regardless of how the returns are.

Just ask all the fund holders of the "legendary" Bill Miller how they are feeling today. His fund is exactly where it was back in 1998. I am sure, as he is sailing around in his yacht, counting his hundreds of millions in the bank, he is thinking of all his fund holders...LOL.

Not.

2008 Aug 18 05:42 PM

[PIA:]

Archman82011: Capital Research & Management Co (American Funds) has a 75 year demonstrated history of providing their fund investors with consistently superior long-term investment results.

You are correct that most fund managers do not 'outperform' comparable 'passive indexes'. But this is clearly not the case for America's largest and most successful long-term fund manager, American Funds.

By the way, American Funds "advertising budget is zero", expenses are very low, global research and management capabilties are unparalled, and their multiple portfolio coundslor system has been the unique key to providing such outstanding long-term investment returns for their 'active portfolios'. Low turnover is also key with a 3.5 year average holding period.

See americanfunds.com before you 'throw the babies out with the bath water'.

2008 Aug 19 09:18 AM

[300mph:]

PIA, nice sales pitch. Do you work for CR&M, or did you just cut -and-paste that info. from their website?

2008 Aug 19 11:56 AM

[Old Trader:]

archman,

Perhaps if you'd read the piece a bit more carefully, you'd have seen the part about many of the orginal shareholders dying off, resulting in redemptions. That makes sense to me. Congrats on your returns, though.

Something else you overlook in your castigation of mutual funds, is that many/most are geared towards a specific market segment, or asset sector. If you managed a fund that was billed as "foreign, large cap", I, as one of your invertors, would be sorely pissed to find out 10% of the portfolio was in US-based biotech microcaps!

2008 Aug 19 08:03 PM

[mkreisel:]

Once you include American Funds' sales loads, they no longer outperform. :)

2008 Aug 22 05:14 PM

[arctan:]

I totally agree about mutual funds, but there's one point I'd add and that is that mf's do provide a good way for the small investor to diversify and hold peices of alot of companies. For years I simply couldn't afford to build up a wide protfolio of American large cap companies not to mention getting exposure to emerging markets, etc.


On Aug 18 05:42 PM archman82011 wrote:

> archchanceII:
>
> Nope. I am not about to tone back the cynicism and take a more measured
> approach.
> The majority of mutual fund managers are criminals who can only make
> money in bull markets and who do nothing to preserve a fund holders
> money in bear markets. There is no excuse as to why these overpaid,
> educated, MBA types, who all claim to be experts in the field, should
> lose even close to what the S & P 500 loses in a bear market.
>
>
> I do not think I am smarter than anyone, Not you, not anyone. I am
> just a simple, self employed family man. No MBA, and I do not manage
> money for a living. I invest only in stocks.
> My 15 yr annualized portfolio return: +20%
> My only losing year: 2002, down -4%
> My YTD return: +5%.
>
> Why is it "a nobody" like me, can manage my money, and have the sort
> of returns that 99.9% of fund managers cannot even come close to
> attaining? Because I have a true vested interest in managing my money
> and I do not get paid for it, regardless of how the returns are.
>
>
> Just ask all the fund holders of the "legendary" Bill Miller how
> they are feeling today. His fund is exactly where it was back in
> 1998. I am sure, as he is sailing around in his yacht, counting his
> hundreds of millions in the bank, he is thinking of all his fund
> holders...LOL.
>
> Not.

Feb 09 01:19 PM