Sequoia Fund Reopens After 26 Years: A Look Inside

by: Graham Summers

Warren Buffett is best known as the Chairman of Berkshire Hathaway (NYSE:BRK.A)(NYSE: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 (NYSE:MHK) 7%
Martin Marietta (NYSE:MLM) 6%
Fastenal (NASDAQ:FAST) 5.8%
Progressive (NYSE:PGR) 5.4%
TJX Companies (NYSE:TJX) 5.2%
Porsche Automobil (PSEPF.PK) 4.9%
Idexx Laboratories (NASDAQ:IDXX) 4.6%
Target (NYSE:TGT) 4.4%
Bed Bath & Beyond (NASDAQ: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: