Sequoia Fund investor day transcript for the month ended June 30, 2017.

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Sequoia Fund

David Poppe:

Good morning. Welcome to our 2017 Investor Day. I am David Poppe, and I am joined on the dais today by members of the Ruane, Cunniff & Goldfarb Investment Committee: John Harris, Arman Gokgol-Kline, Trevor Magyar, and Chase Sheridan, plus non-voting but always helpful member Greg Alexander. Also on the dais with me are our most famous analyst and late arriver, Johnny Brandt, Greg Steinmetz, and our new head of operations, Wendy Goodrich. In the front row is the rest of our exceptional research team whom I will introduce in a bit, and which we believe is the strongest group in our industry. It is good to be with you, and especially to see so many familiar faces in the audience today. We certainly appreciate the trust that you have placed in us.

As we did last year, we would like to spend the first part of the meeting today updating you on what is happening inside our firm and at the mutual fund. I will provide an overview of the day. John Harris will talk about why we feel confident in our process and our culture. Next, members of the team will give short presentations on some key initiatives happening inside Ruane, Cunniff. This should take a little less than an hour, and leave plenty of time for questions. We will finish the formal program at about 12:30 PM, but we will stay here for another half hour or so to answer any individual questions that you may have. We do need to clear the ballroom by one o’clock.

A year ago at this meeting, we tried to address directly what we saw as the major issues facing our firm: what leadership would look like going forward, what needed to change, what was too important to change. And while 2016 was a very trying year for us and for you, I am proud that we have done the things we told you we would do. Since the leadership change, we have retained all of our key employees and the vast majority of our clients. We are investing in our business. On a personal level, all of us on the dais have invested our own money in the business. On a professional level, we are investing in our people; we added two excellent analysts in January. And we are implementing new technology. Last fall we hired a new head of operations, Wendy Goodrich.

Among her many duties, Wendy is reviewing and upgrading our internal technology. She is off to a great start, and you will hear more from her in a few minutes. We intend to invest more in our client service function this year, something my partners will talk more about in a bit.

On the investing side, as you probably know, we experienced an elevated level of portfolio turnover relative to our history. We know it is painful for taxable shareholders and other clients to pay the toll on capital gains in a year when performance is poor. And it is only lukewarm comfort to recall that those gains were a result of years of mostly terrific stock performance and tax-deferred compounding. However, we believe the decisions to sell were sound.

We certainly did not top tick every sale, but taken in aggregate, the stocks we sold over the past year have underperformed the S&P Index since our sale. We also purchased eight new securities. Of course, one year does not a record make, but those eight stocks have in aggregate outperformed the S&P since initial purchase. Today, these eight securities account for nearly one quarter of Sequoia’s assets. The result of this activity is a re-focused portfolio. When I became CEO in April 2016, Sequoia consisted of investments in 33 businesses. At the end of the first quarter of 2017, we held 26 positions. We are very pleased both with the initial performance of the stocks and, more importantly, with the health of the businesses we now own.

Given the unusual level of activity in the portfolio, it is natural for clients to ask how we are changing. I would say that we are rededicated to the principles of investing that we learned from our founders. While our portfolio is more focused than it was a year ago, it is less concentrated in our largest holdings. We are working hard every day to identify terrific businesses trading below their intrinsic value. The overall stock market today is expensive. There are precious few cheap stocks, but we are value investors. We continue to invest with a long-term focus, trying to identify and buy for responsible prices businesses with the potential to grow for years. At a time when many smart people are looking at every good idea, we think our ability to invest with a long-term horizon is a competitive advantage, as the intrinsic value of long-duration growth can often be underappreciated by investors distracted by short-term momentum. We play to our strengths.

This gets to another issue, which is the wisdom of establishing an Investment Committee. I will repeat today what I have said many times now over the past year, which is that you should think of us less as a committee and more as a team. For one thing, the six of us including Greg Alexander have a total of 98 years of experience at Ruane, Cunniff. We have worked side by side for the past decade. We all came to Ruane originally because we wanted to be great investors and we have all internalized the culture and values of Ruane, Cunniff & Goldfarb. My colleagues have been the primary idea generators for the last ten years, not just the past year. I want to take just a moment to comment on the recapitalization transaction that you were contacted about in the spring. In March, Sequoia shareholders and separately managed account clients were asked to approve a transaction through which we sold a block of stock to some of our senior employees. Technically, this constituted a change of control. As a practical matter, the change of control happened a year ago when Bob Goldfarb retired. We sent out a similar consent letter twelve years ago after Bill Ruane’s death when we repurchased shares from his estate. Bob Goldfarb remains a stockholder of the business, as does the Cunniff family. Our current employees now own a much larger percentage of the company than they did before, and they have tremendous incentive to stay and make our business more successful. In addition, as I mentioned, all six members of our Investment Committee invested in Sequoia Fund in 2016, and we will invest in the fund in 2017. We are putting even more of our money where our mouths are.

That is a high-level look at activity inside our firm. I would like to now provide you with a little more perspective on our investment strategy. We think it is critical that you understand it.

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