Sequoia Fund
Richard T. Cunniff

I have been following sequoia Fund for several years. It is arguably one of the best mutual funds ever. The fund was started after in 1970, after the Warren Buffett partnership ended, and Warren Buffett became Chairman of Berkshire Hathaway. Sequoia was founded by William Ruane, who was named by Warren Buffett as one of the “Super Investors of Graham And DoddsVille“. William recently passed away, and the fund is run by Richard T. Cunniff.

Sequoia Fund has one of the best long term track records for a mutual fund. Since inception in 1970 through September 30, 2007, the Fund has returned 15.57% average annually. During the same period the S&P 500 returned an average 11.86% annually.

When Ruane started the fund in 1970, he bought shares in Berkshire Hathaway. Slowly, over the years the price of Berkshire Hathaway increased so dramatically that it represented over 25% of the fund’s holding. The directors did not want to sell the stake because it would result in massive capital gain taxes for shareholders, and it might be a snub to Buffett. It was assumed the fund would eventually reduce its stake in Berkshire, the only question was when and how.

In the recent shareholder letter,

made the following startling announcement:

During the first quarter, we significantly reduced the size of our holding in Berkshire Hathaway. This sale of shares was atypical for us in that we knowingly sold a stock at a discount to its intrinsic value. The only
times we have done this before were when we were fully invested and wanted to raise funds to buy another stock which we thought was selling at a greater discount. This was not the case here because prior to the Berkshire sale we had ample liquidity.

We reduced the size of the Berkshire position for two reasons. The principal one was the size of the position as a percentage of the portfolio. The second was the law of large numbers. Historically we always had a policy of owning up to 15% of the portfolio in a single stock if we felt that it was a compelling value. We made an
exception for Berkshire for two reasons. First, Berkshire’s broad diversification made it less subject to the risk inherent in a single business. Second was our strong belief in Warren Buffett’s genius. However when that genius says that the future growth rate of his company’s book value will be substantially less than its historic
rate it behooves one to take heed.

The timing of the sale was driven by our belief that while Berkshire was still selling at a discount to its business value the run-up in the price of its shares in conjunction with their entry into the S&P 500 made that
discount considerably less than it had been for some time.

After the sale Berkshire remains by far our largest holding. In other past situations in which we sold part of a holding Bill Ruane would say, “Let’s sell it and hope that it goes up.” Our expectation is that over time
Berkshire’s share price will increase further as its underlying value grows. We continue to have a large stake in that outcome.

Now the stake of Berkshire is 15% of Sequioa’s portfolio. I would not be surprised to see future reductions by Sequioa fund in the future.

To read the full report, and see Sequioa’s full list of holdings click here