A Short History of the Sequoia Fund

Sticking to What Works

Reopened after a 26-year closure, Sequoia hews to a time-tested approach

This month Sequoia Fund marks its 40th anniversary. It's a milestone rarely achieved in an industry where three years is considered long term.

Even more remarkable is that Sequoia is being run pretty much the same as it was when Warren Buffett's friend and stockbroker, the late Bill Ruane, launched the fund in 1970. It's still a concentrated portfolio with two or three dozen stocks, all heavily researched and bought with the idea that the market is valuing them at less than their true worth. Co-managing the fund is Robert Goldfarb, whose tenure at the New York firm dates back to 1971.

In 2008 the fund re-opened its doors to new investors for the first time since 1982. Some wondered whether the reopening of this exclusive club somehow indicated that it was past its glory days. But its managers at Ruane, Cunniff & Goldfarb Inc. don't seem to be resting on the fund's reputation.

Sequoia's returns have bested the Standard & Poor's 500-stock index over the past three, five and 10 years. In 2008, amid the financial crisis, Sequoia held up better than 97% of the competition in Morningstar Inc.'s large-blend category. As stocks snapped back from the bear market, Sequoia initially lagged, but as of June 30, the fund was three percentage points ahead of the S&P over the prior 12 months with a 17.5% gain, beating 90% of its peers.

Still, Sequoia had its worst year in 2008—a 27% decline. In the wake of those losses, the fund's managers made a concession to recent market developments: While continuing to focus on the prognosis for individual stocks, they decided to pay more attention to "macro" market and economic forces than they have in the past.

Time Warp

But when Sequoia held its annual shareholder meeting in mid-May at the posh St. Regis Hotel in midtown Manhattan, the event was like a trip back in time. On the dais, seven men in dark suits answered questions from well-dressed investors in a room where chandeliers hung from the ceiling and sconces adorned mirrored walls.

Each annual meeting for Sequoia is an unscripted event that would give marketing officials at most fund companies fits. No opening statement, no PowerPoint presentation—just questions and opinions from Sequoia investors who are well versed in the fund's portfolio and investing philosophy.

The managers spoke bluntly, not just about the fund's performance, but about the management of companies in which they invest. And this, too, was a rarity, as many fund managers are loath to criticize corporate executives for fear of having access cut off.

David Poppe, Sequoia's co-manager, said that an investment in Porsche Automobil Holding SE "has been a disaster" thanks to a decision to merge with Volkswagen AG that he also called a "disaster" created by Porsche's management. And in response to a question about why Sequoia owned shares of two competing auto-parts chains but not Autozone Inc., Mr. Goldfarb noted that the fund had owned Autozone but "made the mistake of selling it."

No Pushing

In words and deeds, Sequoia's managers go their own way. Despite re-opening the fund, there's been no marketing push to attract investors. In fact, despite its performance, the $3 billion fund has taken in only a net $144 million since allowing in new shareholders. Mr. Goldfarb, meanwhile, though he agreed to be interviewed for this article, declined to be photographed.

In a conversation several weeks after the annual meeting, seated in a conference room at the firm's offices sporting a spectacular view north over Central Park, Mr. Goldfarb says that "to understand our culture you need to understand Bill Ruane."

Mr. Ruane, who died in 2005, "loved the craft of investing," Mr. Goldfarb says. As the long closure of Sequoia indicates, he wasn't interested in raking in profits by continuously bringing in money from new investors. And it was crucial to Mr. Ruane that the firm be independent and not part of a big mutual-fund company.

Mr. Ruane founded the firm with Richard Cunniff, 87, who is no longer involved with the firm on a daily basis but is still vice chairman of Sequoia Fund.

Mr. Goldfarb, 65, recalls how he came to join Ruane, Cunniff in 1971. His father, who was in retail, met Mr. Buffett and mentioned that his son, Bob, was looking for a job on Wall Street. Mr. Buffett suggested getting in touch with Mr. Ruane. But he cautioned that given Mr. Ruane's attitude toward maximizing profits, "I'm not sure Bob is going to make serious money."

But the firm, of course, has prospered. It manages $13 billion, including $3 billion in Sequoia. The firm also manages private accounts for institutions and affluent investors and has been in the hedge-fund business since 1996, branded with the name Acacia. Like Sequoia, the hedge funds are value-oriented offerings. But they include short positions to bet that certain stocks will fall, and they are more internationally focused.

For years Sequoia has been associated with Mr. Buffett, not just because he referred clients to Sequoia when he closed his partnership in 1969, but also because the fund, since first buying Berkshire Hathaway stock about 20 years ago, has made it a major holding. At one point it was nearly 30% of the portfolio.

Normally Sequoia won't hold more than 15% of its assets in a single stock. But an exception was made for Berkshire because it's a widely diversified company and Sequoia managers long believed it was trading well below its intrinsic value.

But in the first quarter, Sequoia made a significant reduction in its Berkshire position, cutting it to about 15% of assets from 20%. Mr. Goldfarb said the managers were heeding Mr. Buffett's prediction that future growth in Berkshire's book value—essentially its assets minus liabilities—would slow. In addition, with a surge in Berkshire's stock price accompanying its entry into the S&P 500 earlier this year, Sequoia's managers believe the stock isn't as inexpensive as it used to be.

More Attention to Macro

Another recent change: a decision to pay closer attention to the possible effects of macro forces on the fund's investments.

"We're really one-balance-sheet-at-a time, one-company-at-a-time kind of investors," Mr. Poppe said in May 2008 at the shareholder meeting. "We don't spend a lot of time on macro."

Months later, the financial crisis hit, and economic forces swamped stock-picking skills.

Sequoia wasn't hurt as badly as some funds were, because it wasn't heavily invested in financials. But the fund suffered losses on companies heavily dependent on economic growth, such as flooring manufacturer Mohawk Industries Inc.

Today, the focus is still on balance sheets, but the Sequoia managers try to minimize the impact of economic ups and downs on the portfolio. "There's a heavier burden on a cyclical company" to find its way into the portfolio, says Mr. Goldfarb.

For Mr. Goldfarb, however, one-stock-a-time investing is what the firm is really about. "I wish we could go back to the old days," he says.