Sequoia Fund suffers yet another blow from Valeant stake
Published: March 28, 2016 at 2:35 p.m. ET
Ciara Linnane
Morningstar lowers fund to Bronze from Gold rating
SEQUX
Sequoia Fund Inc. took another blow Monday, after Morningstar lowered its analyst rating on the mutual fund, which has been battered by its exposure to troubled drug company Valeant Pharmaceuticals International Inc.
Just five days after the fund's star manager Robert Goldfarb stepped down, Morningstar lowered the analyst rating to Bronze from Gold, the third level in a five-tier system. The analyst rating is a forward-looking analysis of a fund based on an analyst's confidence in its ability to outperform its peers, or a relevant benchmark, in the long term. The ratings are Gold, Silver, Bronze, Neutral and Negative.
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The $5.6 billion Sequoia Fund SEQUX, +0.02%, which follows a non-diversified buy-and-hold strategy, has been hit hard by its stake in Valeant. That holding accounted for more than 30% of its portfolio at one point in 2015, The Wall Street Journal has reported. The fund posted a 7.3% loss in 2015 and is down almost 12% so far this year, placing it near the bottom of its large-growth peers.
Valeant shares US:VRX have fallen 86% in the last 12 months amid scandals involving its drug pricing strategies, and its accounting and distribution practices. On March 21, the company said it was replacing Chief Executive Michael Pearson and acknowledged improper conduct by its top financial officers. Activist investor William Ackman, who also has a large stake in Valeant, was appointed to the board.
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Sequoia's portfolio "already looks far different from its year-end snapshot," according to Morningstar analyst Kevin McDevitt.
Management sold 1.5 million Valeant shares in mid-March to raise cash and book capital losses, which should help lower its investors' tax bill. With Valeant stock down about 70% in the year so far, the position is probably now less than 7% of assets, said McDevitt.
The sale raised $800 million in cash, equal to about 14.5% of assets.
"This gives the fund a bit of a buffer as it likely continues to deal with outflows, which were an estimated $300 million over the three months through February," he wrote in a report.
And despite the disastrous position in Valeant, the fund "still has real strengths," he wrote. New manager David Poppe has been with the fund since 1999, and at just 50, can be expected to remain at the helm for years to come. Poppe is experienced and has a strong team of analysts to support him, said McDevitt.
"Even though they plan to stick with the firm's classic approach, their increased emphasis on risk control will change the fund's character," said the analyst.
Read:Valeant provides more restatement details
The fund's long-term results are strong despite the damage wrought by Valeant. Its annualized 15-year trailing return through March 23 is 7.1%, beating the S&P 500 by about a percentage point.
Also see: Valeant stock suffers worst-ever day as activist Bill Ackman pledges proactive role
"The only knock on this fund is that its expense ratio could be lower: It's 9 basis points above the category median for no-load, large-cap funds, and its Morningstar fee level is Average, so it earns a Neutral price rating," said McDevitt.
However, the low turnover of stocks in the fund keep trading costs down. In 2014, the fund's brokerage commissions were just 0.01% of average net assets, compared with 0.07% for the large-cap average.
Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.