Sequoia’s Huge Valeant Wager Propels Storied Fund to Top

CHART: Sequoia Holdings

Sequoia Fund was co-founded in 1970 by a friend of Warren Buffett’s who believed in focusing on “your best six ideas in life.” These days, the $7.8 billion fund has only needed one idea to crush its competition.

Representing 26 percent of the portfolio, Valeant Pharmaceuticals International Inc. is leading Sequoia past 99 percent of peers in 2015 and 98 percent over five years, according to data compiled by Bloomberg. The acquisitive drugmaker’s surging stock accounts for 85 percent of Sequoia’s gain in 2015.

Most mutual fund managers spread their money across many securities to curb risk, while a handful eschew traditional diversification and load up on a few holdings, convinced the rewards outweigh the dangers. Bruce Berkowitz’s $5.4 billion Fairholme Fund has 30 percent of assets in insurer American International Group Inc. David Glancy’s $9.9 billion Putnam Capital Spectrum Fund has 18 percent in Dish Network Corp.

“There are some investors interested in funds that make these big bets,” said Ben Phillips, a partner at consulting firm Casey, Quirk & Associates LLC. “In effect they are saying, ‘If I am going to own an actively managed fund, I damn well want it to be active.’”

Investors need to be ready for sharp swings when hefty positions lose favor, said Steven Roge, a longtime Sequoia Fund holder who oversees more than $200 million at R.W. Roge & Co. in Bohemia, New York.

Sequoia clients got a taste of that turbulence on Aug. 6, when Valeant dropped 6 percent in Canadian trading and the fund fell 2.1 percent in a broad selloff for health-care stocks. Sequoia has returned 17 percent this year through Aug. 10.

Fairholme, Putnam

In 2011, when AIG lost more than half its value as investors dumped financial stocks, Fairholme sank 32 percent. Berkowitz added to the holding, a decision ultimately rewarded as AIG bounced back.

Glancy’s faith in Dish has also paid off. The stock almost quadrupled in the past five years, helping Putnam Capital Spectrum beat 97 percent of peers over that stretch. Glancy and Berkowitz declined to comment.

Berkowitz, in a 2008 interview with Barron’s, defended his philosophy, saying, “If you can buy more of your best idea, why put money into your 10th best idea or 20th best idea?”

The same view prevails at Sequoia. At a 2011 meeting for investors at New York-based Ruane Cunniff & Goldfarb, which runs the fund, co-manager David Poppe referred to the late Bill Ruane, who started the firm with Richard Cunniff.

“We still adhere to Bill’s old precept that your six best ideas in life are going to do the best,” Poppe said. He and co-manager Robert Goldfarb didn’t respond to a request for comment.

Graham’s Students

Ruane met Buffett when they studied under legendary investor Benjamin Graham at Columbia University. When Buffett shut his investment partnership in 1969 to run Berkshire Hathaway Inc., he recommended clients invest with Ruane.

Sequoia has returned almost 15 percent a year since inception, compared with 11 percent for the Standard & Poor’s 500 Index. The fund has more than doubled in size since 2010 despite being closed to new investors for the past two years.

Berkshire Hathaway was Sequoia’s No. 1 position for almost two decades until 2010, when the managers sold down the stake, reasoning growth prospects for Buffett’s holding company had diminished, and bought Valeant.

Based in Laval, Quebec, Valeant acquires other drugmakers, cuts research and development costs and raises pharmaceutical prices when possible. The formula has boosted its market value to $84 billion from less than $7.5 billion when Sequoia first invested.

‘Comfortable’ Holding

The fund has owned roughly the same number of shares since 2010, but the stock has grown as a percentage of the portfolio through appreciation.

“We think Valeant is poised for more growth, both organic and acquired,” the managers wrote in the 2014 annual report. “We think it is brilliantly managed by Mike Pearson and his team. And yes, we are comfortable with the size of our holding.”

Roge, who got a small stake in Sequoia in 1999 as a high school graduation present and has held onto it, understands the long-term approach. He considers the fund’s managers “brilliant” investors who do thorough research, and he is fine with their big bets, though they come with a price.

“You have to be able to ride out the waves that will come inevitably,” Roge said. “In the end you have to trust the managers’ judgment.”

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