Following three years of underperforming the index, the fund Warren Buffett (Trades, Portfolio) once endorsed is moving toward its best return since before a historic collapse at one of its largest portfolio companies.
The Sequoia Fund, founded by luminaries Bill Ruane and Rick Cunniff, enjoyed high esteem from value investors for decades leading up to its bad bet on Valeant Pharmaceuticals. In 2014, Sequoia boasted a five-year annualized return of 17.76% versus 15.45% in the S&P 500 index, and a 10-year annualized return of 9.21% versus 7.67% in the index. But a short-seller report and wave of investigations into its pricing practices hitting the fund’s largest position, Valeant, sent it plunging almost 40% from peak to trough in July 2015 through June 26, erasing three years of gains.
Selling its stake in Valeant, which had measured as much as 36% of the fund’s stock positions, and replacing it with Berkshire Hathaway A-shares (BRK.A), TJ Maxx (TJX) and CarMax (KMX), has paid off for the fund oriented to undervalued securities with potential for growth. Year to date, it has gained 9.67%, beating a 9.34% return in the S&P 500. Though it still has five more months to go, a beat would prevent Sequoia from turning in only its second four-year lag in its history. The gains also place it at its highest in more than a year.
Sequoia exited Valeant in the second quarter of 2016 after further bloodletting continued into the year. Despite the staggering drops from peak to trough, Sequoia’s annual losses stayed within single digits, helped by other top picks in 2015: O’Reilly (ORLY) rose 32% and Alphabet (GOOGL) 47%, in particular.
In 2015, the fund declined 7.29% and in 2016, it fell 6.9%. To recoup its annual losses for the past two years, Sequoia would need a return of roughly 15.97% this year.
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