, Crain News Service
The mighty Sequoia is looking more like a mere sapling in recent months. For most of the year, the New York-based Sequoia Fund, a large-cap value portfolio with close to $5 billion in assets, has been wilting.
It's now at the bottom of the large-cap value heap tracked by Morningstar Inc. of Chicago, although the fund still enjoys 3-, 5- and 10-year returns far ahead of most of its peers.
Sequoia is down 11.4% this year through Aug. 31, according to Morningstar. During the same time period, the large-cap value category has seen a positive return of 6%.
Since April, value stocks have outperformed their growth brethren primarily because the market has broadened and economically sensitive issues have finally had their day. But Sequoia's biggest stakes aren't in the middle of the value rebound, which has favored companies in cyclical industries such as oil and consumer goods. In fact, most of the fund's assets are parked in financial services, a sector that came under pressure amid rising interest rates.
Berkshire Hathaway Inc., Warren Buffett's hodge podge of investments in financial services and consumer companies, makes up about 30% of the fund's holdings and is Sequoia's largest investment. Shares of Berkshire Hathaway are down 8% this year.
The rest of the Sequoia portfolio matches Mr. Buffett's concentrated style.
Although the firm recently sold off 500,000 shares of Progressive Corp., the large Ohio-based automobile insurer, Progressive still makes up a 12% concentration and is down 40.55% this year.
Another large holding is the Federal Home Loan Mortgage Corp., which buys and sells residential mortgages. Freddie Mac is down 18.23% year to date as home loan rates ticked higher in the past two months.
Assets have also fallen, said Michael Gaul, an analyst with Morningstar. In the company's June filing, Sequoia disclosed that it sold off some of its biggest positions -- like the Progressive holdings -- some of it to meet redemptions. Sequoia did not make company officials available for comment, although the firm did furnish a letter to shareholders explaining the underperformance.
"When you maintain a consistent investment philosophy and invest for the long term, you do not need to outperform every calendar year in order to outperform in the long term," the letter says.
The firm has been closed to new investors for more than 16 years. Its style -- much like that of the legendary Mr. Buffett -- has been to focus on a few key positions in companies that managers believe to have solid long-term prospects. In fact the fund currently holds just 17 issues, only 10 of which are common stock.
"Warren Buffett is the epitome of bargain investing," said Glenn Woody, a financial planner in Costa Mesa, Calif., who owns Berkshire stock. "Buy cheap stocks and hold them forever."
That's probably what portfolio managers Robert Goldfarb and William Ruane plan to do, said Mr. Gaul. Turnover in the Sequoia fund is just under 20%, while the average large value fund has a turnover rate of more than 100%.
"Sequoia investments are relatively static," Mr. Gaul said. "They're not going to be jumping around."
Mr. Buffett's company isn't the only one dragging Sequoia down. The fund has had a sizable weighting in U.S. Treasury notes, whose prices have fallen with the rise in interest rates. And at end of June, Messrs. Goldfarb and Ruane moved the fund more than 20% into cash.
Still, Sequoia built a stellar track record during its 29-year history by investing in the same companies that are now a drain on returns, observers said.
"It's done a great job," said Bob Markman of Markman Capital Management in Minneapolis. "It's been closed, but I wish I could get in."