The Sequoia Fund, ranked among the top large-value funds for much of its 29-year history, had a dismal 1999 vs. the Standard & Poor's 500-stock index.
One of the reasons for the decline was Berkshire Hathaway Inc. A shares, which accounted for 30 percent of the $4.32 billion Sequoia Fund's holdings as of June 30, according to Chicago-based Morningstar Inc. Shares of Berkshire, the company Omaha billionaire Warren Buffett runs, were down 25 percent year to date, as of Thursday, according to Bloomberg.
As of Friday, Sequoia was down 18.3 percent year-to-date, trailing the S&P by about 39 percentage points. Its worst previous showing against the benchmark was in 1980, when it trailed by 19 percentage points, according to Morningstar.
"It has had bad years before, but this is a stinker," said Morningstar Research Director John Rekenthaler. "And it's not just a Berkshire Hathaway story."
Berkshire accounted for about eight or nine percentage points of Sequoia's decline, he said, meaning the fund still lost money on the rest of its portfolio.
"It's really an across-the-board disaster," Rekenthaler said. "The second holding is Freddie Mac, and Freddie Mac is down just as much as Berkshire, like 28 percent year to date. And the third holding as of the summer was Progressive [Corp.]," which as of Thursday was down 56.2 percent for the year.
The fund, closed to new investors since 1982, saw $228 million of outflows in 1999 through Oct. 31, according to Financial Research Corp., a Boston-based mutual fund consultant.
Sequoia's worst year was 1973, when it lost 32.8 percent, though it only trailed the S&P by 18 percentage points that year, according to Morningstar.
"I'm not concerned at all," said Tim Medley, president of Medley & Co., a Jackson, Miss.-based investment adviser that holds a "substantial" position in Sequoia shares and may add to it.
"The only thing that holds me up from adding to it is that a number of the companies they own in their portfolio, like Berkshire, I already own," he said.
Sequoia held only 10 stocks as of June 30, and Berkshire, Freddie Mac and Progressive made up about 60 percent of its holdings. That's a high concentration, even for Sequoia, Rekenthaler said.
Fifth Third Bancorp, Harley-Davidson Inc. and a variety of small positions in other stocks accounted for an additional 15 percent, with bonds and cash accounting for the final 25 percent.
"Periodically, Sequoia will substantially underperform its peers, but not by this much," Rekenthaler said. "Sequoia's usually a concentrated fund, but it's more concentrated now than in the past. Their management's been bearish on the overall stock market, which means that there are fewer and fewer stocks that they are willing to own."
The fund ranked among the top large value funds in both 1998 and 1999 after experiencing "some rocky years" in the 1970s and early 1980s, he said. William Ruane and Richard Cunniff started the fund in 1970. Robert Goldfarb and Ruane currently manage it, according to Morningstar. No one representing the fund was available for comment.
Some Sequoia shareholders will likely stay loyal, at least through 2000, given the number of strong years the fund has had, Rekenthaler said.
"By definition everybody in Sequoia is a long-term investor since they haven't had new shares opened," Rekenthaler said. "But even they will start to get queasy if it has another year even close to this."
Medley said he'd look at the circumstances behind another year of underperformance and wouldn't sell Sequoia based only on its performance over a specific time period.
So far, Medley's experience with Sequoia has been "terrific," he said.
"I've probably earned more than 15 percent a year, I think," he said. "The people that run Sequoia Fund buy great businesses and hold on to them."
Medley continues to have faith in Buffett as well. Those who think Buffett should invest in highflying technology stocks tend to believe there are only a few ways to make money in stocks, Medley said.
"There are hundreds and hundreds of companies that he can select from that will do just fine, and he will do just fine in the spectrum of money managers, even though he doesn't invest in technology," Medley said.