Sequoia Fund’s Ruane, Cunniff & Goldfarb Investor Day 2016 transcript. Some interesting comments about Valeant – see the full transcript below.
David Poppe: Good morning. I want to welcome all of you and thank you for coming today to our annual investor meeting. Greg Alexander recalls Bill Ruane holding a meeting in his office over 30 years ago with about a dozen or so Sequoia shareholders. I apologize for the crowded conditions today and the fact that some of you may have to watch the meeting from an overflow room. We booked this ballroom many months ago. We knew we had outgrown the St. Regis ballroom, but we did not anticipate quite this level of interest.
We know the big crowds today are the result of our disappointing performance over the past eight months. You are here because you are concerned about your investments with us and about our management transition. We fully expect to hear criticism and pointed questions this morning. However, in light of the important changes that have occurred here, we are going to add a bit more structure to the meeting this year.
I will begin by talking for a bit about the state of our firm: what is changing and what is too important to change. My colleague, John Harris, who will be joining me on the Sequoia Fund Board of Directors, will discuss our investment results. We will talk about our investment process, and I will try to tackle some of the questions clients have been asking us about Valeant. The changes to the meeting structure are designed to address directly what we think are the major issues facing our firm: what the leadership will look like going forward, what happened with Valeant, and how our research process works.
In all, these reports should take about an hour. After that, we expect to have 90 minutes to answer your questions.
Before I start on the state of our union, let me remind everyone that this is a voluntary meeting. We enjoy doing it and we plan to keep doing it. We get to see many good friends and it is healthy for us to stand up in front of you and talk about our process and our results. It is also good for us frankly to have so many clients and friends see the depth and strength of our team. But we do not invite the public or the press, and we ask everyone to honor the off-the-record nature of this gathering by not taping, transcribing, tweeting or reporting about it. This meeting has always been for our clients, and we will issue an edited transcript over the summer as we have always done.
Okay, with that, where are we today? We have managed through a two-year transition in two months. During that time, the analyst team, our director of client services, Jon Gross, and I have spoken to more than 500 clients, many of you in person. And without minimizing the stress we have created for you, we feel that we are moving forward and each day spending a little less time on client-facing activity and more time on investment research. Both are important, but ultimately stock-picking will drive your returns.
We have lost some clients and some assets. You have probably read about that, but we remain a very strong firm. We have nearly $20 billion dollars in assets under management, including $5 billion dollars in the Sequoia Fund, more than $9 billion dollars in separate accounts that are managed in similar fashion to the Sequoia Fund, and about $5 billion dollars in the private investment partnerships, managed by our colleagues John Harris and Greg Alexander. As our size indicates, we remain very healthy. We have retained all of our key employees and our entire research budget.
We started the year with 22 people in stock research. Bob retired and our lead Valeant analyst resigned. The other twenty people in research remain in place. We intend to add research analysts over the course of the year. And, for the record, our most important employee, Jo Ann Chiarelli, is staying. For those of you who do not know her, Jo Ann was Bob’s assistant for 27 years and is one of the unsung heroes of our firm. The research team has been together for years. Nearly all of the senior people were handpicked by Bill, Rick, and Bob. We benefit enormously from the culture Bill Ruane and Rick Cunniff created and from the great long term results they, and we, have generated for clients. We have been deeply moved by our clients’ loyalty and long-term perspective, and we know that is a reflection on Bill, Rick, and Bob. We believe we offer an unusually good work environment for someone who is passionate about long-term investing. Our stability over many years means our people have internalized our values and priorities. There is no cultural shift that is happening or that needs to occur. We simply continue doing what we do well.
Our investing philosophy will not change. We remain committed to a bottom-up, research-driven process that results in a focused portfolio of 25 ? 35 businesses that we know very well. Bill Ruane liked to say that your six best ideas in life will do better than all your other ones. And you should expect the top half dozen or so companies in your portfolio to make up a large chunk of the assets. During Bob Goldfarb’s eighteen-year tenure as CEO, we broadened our research focus and added more analysts to our team and more positions to Sequoia. But we remain committed to the idea of a focused portfolio of equities selected after intensive research and held for years.
We have written to you that we have established an investment committee. That feels like a change. Many clients ask how the committee will work, and I hear two common remarks. One: Committees do not work. Two: Investing is a business of individual talent— One portfolio manager creates the value; others support that portfolio manager. Let me point you back to history. From at least the 1980s through 2002, four people signed all the Sequoia mailings to clients: Bill Ruane, Rick Cunniff, Bob Goldfarb, and Carley Cunniff. All four were on the Sequoia Fund Board. When Carley retired, I replaced her on the Board. My predecessors did not call it a ‘‘committee,’’ but there has always been a collaborative process here. Bob and Bill worked very closely together for many years. But Rick and Carley had strong voices and they weighed in. Bill always believed the lead analyst on a project had to have a say in the investment, and we have always been run that way. I can tell you that in 2000, Bill wanted to buy TJX and Ross Stores, and I was his lead analyst on that project. I told him buying Ross was a bad idea, as TJX was, in my opinion, the better company. Since then, TJX has risen in price by almost fifteen times our original cost. But Ross has done about the same. I wish we had owned them both! But the point