The Sequoia Fund is opening its doors to new investors for the first time since 1982.
Sequoia may be the closest thing to a legendary fund as the industry has seen. It was started by Warren Buffett's stockbroker; Bill Ruane was a friend of Mr. Buffett's when he co-founded Sequoia in 1970, at a time when Mr. Buffett was liquidating his investment partnership and advised his clients to take their cash to Sequoia.
An investor who plugged $1,000 into Sequoia back then would have a little more than $200,000 today, according to Morningstar Inc. By comparison, the same investment in an S&P 500 fund would be worth about $63,000. Morningstar data showed that the fund outperformed its large-cap blend category peers in 332 of the 333 rolling 10-year periods dating back to its 1970 start.
When the fund stopped taking new accounts, some financial advisers started purchasing shares directly from people who had gotten in during the open days. Experts can think of no other closed fund that developed that kind of black market.
But performance was just one reason Sequoia won admirers.
"Sequoia used to stand out as an isolated beacon of the fund world, of how to do everything right from a management standpoint, performance standpoint, and governance standpoint," said Don Phillips, managing director at Morningstar. "They were doing the right thing years before the groups we now think of as doing the right thing ever even came along."
Sequoia was such an influence that Mr. Phillips and other early researchers at Morningstar created the so-called Steadman-Sequoia test, linking Sequoia with the Steadman funds, arguably the worst fund family of all time.
The Steadman-Sequoia theorem was that if a research study did not put Sequoia at or near the top of the heap and Steadman at or near the bottom, the research must be flawed. (The Steadman funds were ultimately renamed the Ameritor funds, and one of those two issues closed last year, having finally lost all of its money to the point where its shares were completely worthless, the first fund ever to go all the way to zero.)
Reopening on May 1 serves a key purpose: Sequoia's shareholder base stopped growing 26 years ago, and management is concerned about attrition. Assets topped $5 billion a decade ago; today they stand at about $3.8 billion.
That money is invested in fewer than 25 stocks, and one-quarter of its cash is invested in Berkshire Hathaway Inc. That said, investors now have other options. Over the last five years plenty of similar funds have blown past Sequoia, most notably the Fairholme Fund, which also has a focus on investing the Buffett way and which owns a big slug of Berkshire stock.
"This fund has been challenged by the last five years," says Geoff Bobroff, a consultant based in East Greenwich, R.I. "It's a fair worry that this was the fund that your father would have wanted to own, and now that you can get it, there's more reputation than performance left. … But it's hard to argue with a fund that has done pretty much everything right."
Skeptics will note that Mr. Ruane died several years ago, and have suggested that the reopening is designed to position the fund to make more money if the current team decides to sell out. And no one expects Sequoia to take a flood of cash and go on a short-term performance tear; this is a fund for investors who plan to be there a lifetime.
