How Sequoia Fund's Valeant Mistake Upended a Top Performance

  • Fund's other top investments soared in the past 12 months
  • O'Reilly Automotive, TJX both gained more than 20 percent

The managers of the Sequoia Fund built a reputation as stellar stock pickers over 45 years. It took one year and a single bad stock pick, Valeant Pharmaceuticals International Inc., to tarnish it.

Just how bad a mistake was holding on to the stock as it tumbled? David Poppe, the manager of the fund, said in an April 19 letter to shareholders that Valeant was responsible for more than 100 percent of the fund’s 11.3 percent loss in the first three months of 2016.

Here’s another way to look at it: Excluding Valeant, the fund would have returned an estimated 8 percent over the past year, according to data compiled by Bloomberg -- far better than the 3.2 percent gain in the Standard & Poor’s 500 Index and beating almost all the fund’s rivals.

Many of Sequoia’s top holdings have soared in the past year, with dividends included. O’Reilly Automotive Inc., an auto parts retailer, gained 28 percent, discount retailer TJX Companies Inc. rose 21 percent and Fastenal Co., which sells industrial supplies, climbed 16 percent. All have been in the portfolio for more than a decade, data from the fund’s annual letter show.

Poppe declined to comment on the analysis.

Sequoia, started in 1970 by a friend of Warren Buffett’s, returned 14 percent a year through the end of 2015, compared with a gain of 11 percent for the S&P 500. Thanks to Valeant, which at one point represented more than 30 percent of the fund’s assets, Sequoia fell 22 percent in the past 12 months, worse than 99 percent of rivals.

Poppe and former co-manager Robert Goldfarb summed up Valeant’s impact on the fund in their year-end letter to shareholders. “Our own credibility as investors has been damaged by this saga,” they wrote.

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