Mayday Mayday...Sequoia Fund To Reopen

April 25, 2008

The last time investors could buy shares of the Sequoia Fund (SEWUX), Olivia Newton-John was at the top of the charts. The longest closed-to-new-investors period in mutual fund history ends May 1st:

The Sequoia Fund, after experiencing selling by investors, is reopening its doors May 1 to new investors for the first time since 1982.

The $3.5 billion value fund is celebrated for outperforming the broader market during much of its 38-year history. For years, it was run by legendary stock picker William Ruane, who followed the same approach as Benjamin Graham and Warren Buffett.

In recent years, however, Sequoia has a mixed performance record, lagging the Standard & Poor's 500-stock index in three of the past five calendar years.

Selling by investors caused assets to fall to a level lower than it was a decade ago, the funds' managers wrote in a report for the quarter ending March 31. If that were to continue at that rate, it could 'cause us to have to sell stocks that we didn't want to,' said co-manager Robert Goldfarb, 63 years old, in a telephone interview Wednesday."

Fund investors are bailing out of the fund in part because of its relatively ho-hum performance in recent years, but mostly because of demographics - you close a fund to new investors long enough eventually asset levels will go down.

We've never given the Sequoia Fund much thought for our private management clients or Powerfund Portfolios, mostly because we couldn't have bought shares if we had wanted to - but now that it is set to reopen we still wont be first in line to invest. The fund was too large to outperform and with a ginormous 25% stake in Berkshire Hathaway and a low turnover portfolio, investors could almost rebuild the fund stock by stock. That said, we give the fund kudos for being one of the few value funds to pass on banks and other financials even though they looked cheap relative to the market.

We're also wary because funds with low cost basis holdings are not good places for new investors if other investors are leaving. Newbies could see big piles of other peoples tax liabilities distributed to them at the end of the year (something the fund company notes in their last report). The reopening should partially alleviate this problem as inflows will counter outflows, but fund investors are pretty cool on domestic stock funds with so-so records in recent years so inflows could be limited. Investors who have tax deferred accounts (and who hence don't have to worry about potential tax liabilities) that want to lock in shares of the fund in case it closes again may want to do so with the fund's $2,500 IRA minimum ($5,000 regular accounts).